You would like to set up a new company in the US to expand the business overseas, but don’t know how to start? One of the best challenges is choosing the appropriate structure that fits your business models. This blog written by LNT Consulting will provide a basic understanding on different types of US companies for non-residents to consider before making an informed decision.
Sole proprietorship – Is it a good choice?
A sole proprietorship is one of the most common type structures in the US, an unincorporated business run by an individual person. Below is the pros and cons of sole proprietorship that might be of interest to you:
Key advantages of sole proprietorship
– Simplicity and low cost: There is no application form or registration process, you’ll be automatically considered as sole proprietorship by the IRS of the US. The administrative startup and maintenance cost is low.
– Full control: As the sole member, the company will be managed and controlled 100% by you, no need to consult with partners or the board of directors.
– Tax benefit: Enjoy pass-through taxation, meaning that all profits generated by the business will go directly to the owners, hence, you are only taxed once at personal income tax levels.
– Privacy: The financial information is not to publicly disclose online, providing greater privacy for the business owner.
Disadvantages of sole proprietorship
– Unlimited financial liability: As a sole decision maker, you’ll need to be liable for all business debts (if applicable).
– Limit access on investment: Difficult to find investors, because there are no shares to sell and hard to prove the business potential & strengths.
– Limited banking options: Many commercial banks do not accept to open accounts for sole proprietorship in the US.
Limited Liability Company (LLC) – Best choice for non-residents
Limited Liability Company (LLC) is widely known as the best structure for business, especially non-residents in the US. Each state has its own laws, but basically, the company structure is the same and includes at least one manager, member (can be individual or corporation) and an ultimate beneficial owner (must be a natural person). Let’s find out the advantages and drawbacks of this type of US business.
Pros of an LLC in the US
– Limited liability: The owners of an LLC are only liable for their capital contribution to its LLC, they are not liable for debts.
– Flexible structure: Members can manage their own business, or appoint the managers to run the business. The rules of the US company are set out in the operating agreement which can be customized to fit the needs of business and its members. And it can be changed anytime without informing the State of Secretary.
– Tax benefits: The taxation will be passed through from LLC into its members, it means that the LLC itself does not need to pay taxes on its income, profits and losses will be passed to the members and they have responsibility to report on their personal tax return, avoiding double taxation.
– Simplicity: The cost for company setup and maintenance is relatively low with fewer compliance requirements than C-Corp. No need to hold the annual general meeting or file the annual tax return if you form an offshore company in Wyoming, Delaware or Washington.
Drawbacks of an LLC in the US
– Potential growth limitation: An LLC in the US cannot issue shares of stock and it makes the investor hesitate in raising funds in your business.
– Credibility: The financial information of an LLC will be kept confidential and it’s hard for partners or investors to verify the business strengths online with the relevant authorities.
C-Corporations (C-Corp) – Wise choice for tech and VCs?
C-Corp structure includes directors (run the company), shareholders (owners of the business) and officers (handle day to day operations). Some large companies in the US that you might know are Apple or Alphabet and C-Corp is the right answer if you are looking for fund raising.
Benefits of a C-Corp
– Limited liability protection: As a legal separate entity, the owners of C-Corp have no liability for the company’s debt and lawsuits.
– Access investment: Offer shares of stock, able to raise funds and attract venture funds or institutional investors.
– Ability to public trading: C-Corp can go public and trade shares on licensed stock exchanges, provide significant funding and liquidity for the business.
– Credibility: The financial information of C-Corp in the US must be disclosed publicly and it raises a well-established reputation in the view of customers, partners and suppliers.
Cons of the C-Corp
– Double taxation: The corporation is taxed at its income and the company’s shareholders are also required to pay the personal income tax on their dividends distributed from the company, this can result in higher tax burden compared with sole proprietorship or LLC.
– Complex regulatory requirements: C-Corp is subjected to stringent reporting obligations including holding the annual general meeting, keeping financial records and filing annual reports. Compliance with these annual requirements in the US can be costly and time-consuming.
– Enhanced Scrutiny: C-Corp, especially companies that go public will face increased scrutiny from the regulators, tax authorities and investors, this results in more frequent audits.
– High cost: The cost for company formation and maintenance is higher than other types of US businesses, requiring professional assistance to ensure compliance with legal and regulatory requirements.
Conclusion:
Each type of business in the US offers distinct advantages and drawbacks, including liability protection, costs, legal compliance requirements, taxation or management flexibility. Selecting the appropriate structure depends on the size of business, desired level of personal liability and long term business goals. Thus, it’s crucial to consult with professionals, like those at LNT Consulting, to ensure you select the most suitable structure that aligns with your business.
Disclaimer: LNT Consulting aims to provide up-to-date and accurate information on this website. However, this information is intended for reference only and should not replace professional legal advice. For guidance on your specific case, please contact LNT’s customer service.
