One question usually settles it: will you raise money from US investors? If not, form an LLC. If you will, form a C-Corporation. The rest of this guide explains why, and covers the cases where that rule doesn't hold.
Side by side
Why the LLC is the default
For a business its customers pay for, an LLC costs less to keep, is simpler to run and is taxed once. A single-member LLC owned by someone abroad, with no US trade or business, owes no US income tax on work done outside the country and files one information return a year. A corporation in the same position pays US corporate tax on that profit, and more US tax is withheld when it pays you a dividend. For a profitable business that isn't raising money, that's a second layer of tax for nothing in return.
Why a corporation makes sense when you raise
A SAFE converts into shares, an option plan grants shares, and a term sheet prices shares. An LLC doesn't have shares. Venture paperwork is written for Delaware corporations, so an investor asked to fund anything else will usually ask you to convert first. Funded startups also tend to run at a loss for years, so the corporate tax that makes a corporation expensive for a profitable business rarely bites. Raising from US investors covers the rest.
When the usual answer is wrong
- Canada. The Canada Revenue Agency treats a US LLC as a corporation, while the IRS looks through it to the owner. That mismatch can mean tax in both countries without full credit. Canadian founders usually do better with a corporation, or a Canadian company with a US subsidiary, and should get advice before forming an LLC. The Canada page.
- Other countries that treat a US LLC as a company, including the United Kingdom in most cases. The LLC's profit may not count as yours until it's paid out, and treaty relief may not work the way you'd expect. A C-Corporation, or a company at home, can be simpler. Ask a tax adviser in your own country.
- A profitable business that may raise later. Form the LLC now and convert when an investor is actually ready. Conversion works; it costs legal fees, and most companies never need it.
- S-Corporations aren't an option. A non-resident alien can't own shares in one, whatever a sales page suggests.
Converting later
A Wyoming LLC can convert into a Delaware corporation by statutory conversion when an investor asks. Expect lawyers' fees, filing fees in both states and a few weeks. If you already know you'll raise within two years, forming the corporation now is usually the cheaper route.