Foreign Startups: Forming a Corporation or LLC
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Authored by Bryan Springmeyer Bryan Springmeyer is a California corporate attorney who represents startup companies. The information on this page should not be construed as legal advice. |
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Startups with foreign founders face unique international tax issues that are usually paramount in determining formation issues. There are two primary types of entities that companies form as in the United States – corporations and limited liability companies (LLCs). Each state in the US has their own set of laws for the formation of such entities, but they tend to be pretty similar.
US founders may consider whether a corporation taxed under subchapter C (i.e., a “C-Corp”), a corporation taxed under subchapter S (i.e., an “S-Corp”) or an LLC would make most sense. Corporations with nonresident US taxpayers are not eligible for S-Corp treatment, so I’ll focus my comparison on LLCs and C-Corps.
Partnership Taxation of LLCs
There is no “LLC” tax designation at the federal level. By default, LLCs are treated as partnerships at the federal level (although they can elect to be taxed as C-corps). Partnership taxation on US partnerships with foreign partners is often seen as unappealing, because the partnership will have to withhold (at the maximum withholding rate of 39.6% for individuals and 35% for corporations) the US source income allocable to the foreign partners. The foreign partners will need to file annual US tax returns to get the portion of withholding that exceeds their tax due. Even if there is no income, the foreign partners will need to file US tax returns.
C-Corp Taxation
In contrast, a C-corp would pay its own taxes on income, and foreign residents would not need to file annual tax returns. They would be subject to taxes on dividends, and the default tax rate of such dividends is 30%. However, the US is party to tax treaties with several dozen countries that alter the default rate. Some of the common alterations are: 0% for companies owning 80%+ of the US corporation paying dividends; 5% for companies owning 10%+ of the US corporation paying dividends; and 15% for other dividend payments. The tax treaty with China provides for a 10% rate on dividends.