Delaware is by far the most prominent jurisdiction of choice for incorporating a US company as a non-resident global entrepreneur.
Within Delaware, LLCs or C-Corps are the most common structures. But they couldn’t be more different when it comes to impact on your tax strategy.
C-Corps are more expensive to run, and if you don’t need the benefits they provide, you leave money on the table. LLCs, on the other hand, have lower maintenance costs but are not as flexible when you need to leverage your cap table for growth.
In this article, I’ll walk you through exactly how they differ from a non-resident founder perspective.
Summary: Delaware LLC vs. Delaware C-Corp for Non-Citizens
|Feature||Delaware LLC||Delaware C-Corp|
|Income Taxes||May be reduced to 0%||21% federal tax and 8.7% state tax|
|Franchise Tax||Flat $300||$175 or more|
|Raising Capital||Possible, but hard||Possible, C-Corps preferred|
|Annual Meetings||Not required||Required|
|Incorporation State Fee||$90||$89|
|Maintenance Costs||Same as C-Corps||Same as LLCs|
Delaware LLC v. Delaware C-Corp for Non-Residents: Differences and Similarities
The differences between Delaware LLCs and Delaware C-Corps make one structure a better fit for some businesses than the other. As an international founder, you need to understand them before choosing one.
Before getting into the details, it is important to note two things:
- You can always change the company’s structure. It is easy to transition from LLC to C-Corp. It is less easy to convert from C-Corp to LLC, but it is doable. Even if you make a mistake in choosing the right structure, you can fix it with a little effort. It costs a few hundred dollars and takes two to three days to complete the paperwork.
- Non-citizens cannot incorporate nor be taxed as S-Corps. That’s why we will compare only LLCs and C-Corps in this article. S-Corps are exclusive for US citizens and US residents only.
We’ll get into all the benefits your company could eventually enjoy and compare how the two structure fare in relation to that benefit.
Both structures put a corporate veil between the company and the owners. This means that the law clearly separates the company’s assets from those of the company owners.
In practice, this is important for the bad times when creditors come knocking at your door. If you have to deal with personal creditors, your company’s assets will remain protected. If you have to deal with company creditors, your personal assets will remain protected.
You, as an owner, are a separate person from your company. Your assets are your assets, and your company’s assets are your company’s assets until you distribute them on your own account.
LLCs enjoy more privacy than C-Corps. Actually, LLC members enjoy full privacy. Their names are never published in public records. Only the name of the registered agent appears there. The registered agent is obliged to know who their client is. They must provide the names of the members only if it is required by the law.
C-Corps must disclose the names of the directors and the names of at least one officer. The physical address must be published, too. This information is part of the Annual Report, which is a public record. The names of directors and officers cannot be kept in privacy like the LLC members.
The names of the shareholders, however, are not public.
LLCs are pass-through entities. C-Corps are not. That makes a big difference regarding the taxes you need to pay in the United States as a foreigner who rarely or never sets foot there.
LLCs do not pay taxes as an entity. The tax obligations of the LLC are passed through the LLC onto the LLC members. The LLC members pay personal income taxes on the profits made by their LLC, which are passed onto them. LLCs don’t pay taxes on the profits they make. Their members pay those taxes.
Knowing that non-citizen LLC members are rarely US tax residents, they can easily meet the requirements to reduce the effective tax rate to 0%.
C-Corps are not pass-through entities. They pay taxes as a separate entity. A Delaware C-Corp must pay federal and state taxes. The federal tax rate is 21%. The Delaware state tax rate is 8.7%.
However, C-corps are taxed on their net income. It means that only the distributed profits are subject to taxes. Your distributed profits equal your total revenue minus total expenses. Your expenses include the management fees you may pay yourself for running your C-corp. That is how you can effectively bring the corporate tax rate down to zero.
Companies with high upfront costs for years before making any profits, like many tech startups, often pay no taxes because they have more losses than profits. As a result, there is no income to pay corporate income tax for.
Unlike LLC members, foreign shareholders do not have to submit tax returns to the IRS.
Yet, paying zero taxes with a C-corp requires some planning and wise accounting. Paying zero taxes with an LLC is straightforward.
The franchise tax is a tax on the privilege of having a company registered in a specific state. Not all US state charge franchise taxes, but Delaware is among those that do. Both Delaware LLCs and C-Corps are required to pay franchise taxes.
Raising capital is possible for both LLCs and C-corps.
However, just because it is possible doesn’t mean it’ll happen easily. Investors oftentimes require LLCs to transform into C-Corp because it is easier to handle the cap table.
LLCs have members, while C-Corps have shareholders. When you need to issue equity to investors or employees, your C-Corp will issue shares to shareholders. LLCs need to change their articles of organization to accommodate the investors and employees.
As mentioned above, restructuring an LLC into C-Corp is a low-cost and quick process. Converting from C-Corp to LLC requires a bit more paperwork.
If you want an IPO for your company, it must be structured as a C-Corp. LLCs cannot be publicly traded companies.
You can run your company as a Delaware LLC for years, but once you plan an IPO, you’ll have no choice but to convert it to C-Corp.
If you consider other exits, such as acquisitions, you should know buyers often buy LLCs. A C-Corp will be required only if IPO is your exit of choice.
Delaware C-Corporations must hold an annual meeting, no matter how many shareholders there are. The meetings must be held at least once every 13 months. The meetings are usually held after the end of the fiscal year, where shareholders discuss and assess the performance.
It is optional to hold the meetings on the territory of the State of Delaware, but nonetheless, you must hold the meeting.
LLCs are not required to hold any annual meetings whatsoever.
You can register a Delaware LLC or a C-Corp for a low fee. The state fees for LLCs are only $90, while those from C-Corporations start at $89.
Aside from the state fees, you’ll need to pay for a registered agent and the filing, but in most cases, the chosen structure doesn’t make any difference.
There are no significant differences in the obligatory state fees between the two structures. The only difference is the $50 annual report fee the C-Corps must pay.
Aside from that, all the other state fees remain the same.
The difference in running a C-Corp compared to an LLC is in corporate income taxes and franchise taxes, maybe in paying more complex accounting, but not state administrative fees.
Delaware LLC v. Delaware C-Corp: What Is Better For You?
There are two significant differences for international founders who don’t live in the US:
- LLC will pay no taxes, but cannot receive investments and exit through IPO, and
- C-Corps will pay taxes, but may receive venture capital and exit through IPO.
You should ask yourself now: Do you want to raise capital soon?
If you plan to raise investments, a C-Corp is the better structure. Until then, you can work as an LLC to keep the running costs low and pay no taxes.
Frequently Asked Questions
Can a foreign person own a C-Corp in the US?
A foreign person can own a C-Corp in the US. It is very common for foreigners to incorporate C-Corps in the US, particularly in Delaware, to raise investments. Delaware is the investors’ favorite state and sometimes require companies to move there due to the business-friendly laws.
Can I transition Delaware LLC to C-Corp?
You can transition your Delaware LLC to C-Corp. It is common among companies that grow to convert their incorporation structure. The procedure is straightforward and affordable. The fees start at $179, depending on stocks. It takes two to three days to complete the paperwork and transition.
Can Non-Residents Own Delaware S-Corp?
Non-residents cannot own a Delaware S-Corp or an S-Corp anywhere else in the United States. Only US citizens and residents can own S-Corps or choose to be taxed as S-Corps.
Why do foreign companies incorporate in Delaware?
Foreign companies incorporate in Delaware due to the favorable business-friendly legislation, the Court of Chancery, and the low state corporate taxes. Delaware is the state of choice for many Fortune 500 companies and international founders seeking global business success. It is a good fit for non-citizens who want to raise investments in the United States, although nowadays, investors are likely to invest in other companies incorporated in other states as well.
What makes a Delaware C-Corp better than an LLC?
Delaware C-Corp is better than an LLC if you want to raise investments for your company and have an IPO (Initial Public Offering). C-Corps are better suitable for large companies with many shareholders that want to be publicly traded. The C-Corp structure fits them better compared to the LLC structure. The LLC structure is better for businesses just starting out, businesses that don’t need investments or take the company to the stock exchange.
Is Delaware LLC or Delaware C-Corp Better for Startups?
C-Corps are the better option for startups that need to raise investment and make an exit by going public. Investors prefer C-Corps over LLCs, and only C-Corps can be publicly traded companies. Assuming you want to raise venture capital and angel investments, you have to consider C-Corp sooner or later. You can start working on your startup as an LLC, but if you want to raise venture capital, you may be asked to convert to C-Corp. However, that transition is cheap, quick, and common among startup founders.