Delaware’s Secretary of State posts a table here of the state’s various business structures with comparisons on such factors as ownership, control, liability, taxation, and filing fees. This table serves to give a general understanding of business forms found in the United States. Please note, however, that each state will have its own nuances to these business forms, so this table should not be relied on for any business to be formed outside of Delaware. In addition, before selecting a business form, you should consult with your attorney and accountant so as to fully understand the pros and cons of each type.
As to the table, you will find seven types of business forms. In the United States, two popular business forms foreign nationals may use include the Limited Liability Company (LLC) or the Corporation. These two entities are desirable for those wanting to shield themselves from company liability, such as from the company’s debts. Within the category of Corporations, however, there are two subtypes for federal taxation purposes, only one of which is available to foreign nationals who are not also U.S. permanent residents.
Specifically, there are two types of Corporate entities for federal tax purposes, a C Corporation and an S Corporation. The C Corporation has no restrictions on shareholders. The S Corporation, though, permits only U.S. citizens and permanent residents to be shareholders. Foreign nationals who are not green-card holders cannot be shareholders in an S Corporation
What is the main difference between the two entities?
The C Corporation, is taxed as a separate entity from its shareholders. The C Corporation pays taxes on its income, and then the shareholders pay taxes again on any dividends paid to them by the Corporation. This is what is known as double-taxation. The Corporation is taxed, and the shareholder is taxed again.
The S Corporation, in contrast, avoids this double taxation. An S corporation allows for pass-through taxation, meaning the company’s profit or losses passes through to the shareholder and is taxed on the shareholder’s individual return. This pass-through taxation is particularly beneficial if you think your company will have losses, since those losses would be reported on your income tax return.
An S Corporation, however, can only have shareholders who are U.S. citizens or U.S permanent residents. Foreign nationals who are not permanent residents, however can be shareholders in a C Corporation, or a member of an L.L.C. There are also other business forms open to citizens and foreign nationals alike, such as sole proprietorships and partnerships.
The above is an extremely limited discussion on U.S. business entities. Which entity to choose will depend on many factors other than those mentioned above and, in addition, each state has its own special rules and regulations that must be considered. Before selecting an entity, you should talk to your, attorney, accountant and any other professional who may be relevant to the type of business you want to do to fully understand the pros and cons of each type.
See also our related article Forming a U.S. Company.