LLC vs. Corporation for Foreign Investors
Critical tax differences that can cost you thousands if you choose wrong
The Bottom Line
LLC
Often Best Choice
Single-level tax, flexible
C
C-Corporation
Double tax, but 21% retained
S
S-Corp Blocked
Not available to foreigners
!
Wrong Choice = $$$
Structure matters for taxes
Often Best
LLC (Partnership)
Pass-through taxation
- Foreign owners allowed
- Single level of taxation
- Flexible profit distributions
- Withholding on distributions
C-Corporation
Double taxation
- Foreign owners allowed
- 21% corporate tax rate
- Dividend withholding 30%
- Easier for venture capital
Not Available
S-Corporation
US persons only
- Foreign owners NOT allowed
- Only US citizens/residents
- Election revoked if foreign
- Consider C-Corp or LLC
S-Corps cannot have nonresident alien shareholders - election is automatically terminated if foreign owner added
Understanding LLC Tax Classification
An LLC is a legal structure, not a tax classification. When you form an LLC, the IRS asks how you want it taxed.
Disregarded Entity (Single-Member)
- Default for single owner
- No separate tax return
- Income flows to Form 1040-NR
- Simple, single level of tax
Partnership (Multi-Member)
- Default for multiple owners
- LLC files Form 1065
- K-1 issued to each member
- Flexible allocations
C-Corporation (Form 8832)
- Elective via Form 8832
- LLC becomes separate taxpayer
- 21% corporate tax on profits
- Double tax when distributed
S-Corporation (NOT Available)
- Cannot elect if foreign owner
- Only US citizens/residents
- Often best for US traders
- You must use LLC or C-Corp
LLC (Partnership) Tax Flow
How Foreign Partner Income is Taxed
$100K
LLC Profit
->
21-37%
Tax on ECI
->
$63-79K
Net to Owner
Key Points
- ECI taxed at graduated rates (10-37%)
- Section 1446 withholding (37%)
- Must file Form 1040-NR
- May owe state income tax
Advantages
- Single level of taxation
- Losses pass through to you
- Flexible profit allocations
- Good for real estate rental
C-Corporation Tax Flow
How C-Corp Dividends are Taxed
$100K
Corporate Profit
->
21%
Corp Tax
->
$79K
After-Tax
->
15-30%
Withholding
->
$55-67K
Net to Owner
Key Points
- Double taxation structure
- 30% dividend withholding (or treaty)
- May not need to file personal return
- Retained earnings = 21% only
Advantages
- No ECI filing requirements
- 21% rate on retained profits
- Easier for venture capital
- Stock options/equity comp
Side-by-Side Comparison Table
| Factor | LLC (Partnership) | C-Corporation | S-Corporation |
|---|---|---|---|
| Foreign Owner Eligible | Yes | Yes | No |
| Tax Levels | 1 (pass-through) | 2 (corporate + dividend) | 1 (pass-through) |
| Corporate Tax Rate | N/A | 21% | N/A |
| Individual Tax on Profits | 10-37% | 0-30% on dividends | 10-37% |
| Withholding on Foreign Owner | 37% (Sec. 1446) | 30% (or treaty rate) | N/A |
| US Tax Return Required | Yes (1040-NR) | Maybe not* | N/A |
| Loss Pass-Through | Yes | No | Yes |
| VC Friendly | Less common | Standard | Rarely |
*If only dividend income subject to withholding, may satisfy tax obligation without filing.
Branch Profits Tax: Hidden C-Corp Trap
30% additional tax on profits removed from US business
When a foreign corporation operates a US branch, the US imposes a 30% tax on the "dividend equivalent amount" - essentially, profits removed from the US business. This is in addition to regular corporate tax.
How to Avoid It
- Form a US Corporation instead
- US C-Corp not subject to BPT
- Check your country's treaty
- Keep earnings in US business
Why It Matters
- Operating through foreign company
- Can be more expensive than US entity
- Compare total tax burden first
- Structure planning is critical
FIRPTA: Real Property Considerations
If your entity holds US real property, FIRPTA rules apply when you sell.
LLC Holding Real Estate
- 15% FIRPTA withholding on sale
- Gain taxed as ECI at individual rates
- Any foreign member = "foreign person"
- Single level of tax, but filing required
C-Corp Holding Real Estate
- No FIRPTA on property sale (US corp)
- Dividend withholding on distribution
- USRPHC rule may apply to stock sale
- Two layers but may avoid FIRPTA
USRPHC: If US real property >= 50% of total assets, selling stock may trigger FIRPTA
Special Considerations for Traders
If you are forming an entity to trade US securities, the analysis differs from operating businesses.
Key Points for Foreign Traders
- Portfolio capital gains not ECI (not taxed)
- Dividends: 30% withholding (or treaty)
- Active trading may become ECI
- S-Corp not available to you
Related Reading
- Trading Entity Guide
- Section 475 election considerations
- Self-employment tax issues
- State tax nexus concerns
Which Structure to Choose
Choose LLC (Partnership) If...
Best for:
- Single-level taxation on business income
- Expecting losses in early years (pass-through)
- Flexible profit/loss allocations among owners
- Comfortable filing US tax returns annually
- Holding real estate for rental income
Choose C-Corporation If...
Best for:
- Reinvesting profits rather than distributing (21% rate)
- Seeking venture capital or institutional investment
- Avoiding US personal tax return filing
- Needing stock options or equity compensation
- Tax treaty provides favorable dividend rates
General: LLC for active businesses, C-Corp for startups seeking investment or building retained value