LLC vs C-corp for non-US founders: which one should you form?

LLC vs C-corp at a glance

An LLC (limited liability company) is taxed as a pass-through by default: its profits are taxed to its owners, not to the company. A C-corp is a regular corporation that pays its own income tax, and its shareholders are taxed again when it pays dividends. That one difference drives most of what follows.

How are an LLC and a C-corp taxed if you live outside the US?

LLC: pass-through tax, and US tax only on US business income

By default the IRS ignores a single-member LLC for income tax, calling it a disregarded entity, and treats an LLC with two or more members as a partnership. Either way, the LLC pays no federal income tax itself. Its profit is taxed to you.

As a nonresident, you pay US income tax on effectively connected income (ECI), meaning profit from a US trade or business, at the graduated individual rates on Form 1040-NR. The IRS looks for US business activity that is considerable, continuous and regular, such as selling inventory in the US or performing services while you're in the US. Services you perform from outside the US generally produce foreign-source income.

Tax treaties can go further. Under the US–India treaty, for example, business profits are taxable only in India unless the business has a permanent establishment in the US. An LLC with no ECI may owe no US federal income tax at all, though it still has yearly filings. US taxes for non-resident LLC owners explains how to tell where you stand.

C-corp: 21% corporate tax, then tax on dividends

A C-corp is its own taxpayer. It pays 21% federal tax on its taxable income, including profit from customers outside the US. When it pays you a dividend, it must withhold US tax: 30% by default, or the lower rate in your country's treaty if you give it a Form W-8BEN.

Under the US–India treaty, the dividend rate is 25% for individuals and 15% for a company that owns at least 10% of the voting stock. The corporation reports the payment to the IRS on Forms 1042 and 1042-S by March 15 of the following year.

The illustration leaves out state taxes, deductions and tax in your home country. India, for example, may tax the same income and give credit for US tax paid, and the treatment of an LLC can differ from that of a corporation. Run your own numbers with a US CPA and a Chartered Accountant before you choose.

What does each structure file with the IRS every year?

Every domestic corporation files an income tax return whether or not it has taxable income. A foreign-owned LLC has lighter paperwork, but it isn't paperwork-free.

The pro forma Form 1120 for a foreign-owned single-member LLC is short: the name, address and a couple of items on page 1. Form 5472 carries the real information, listing money that moves between the LLC and you, including what you put in and take out. Our Form 5472 guide walks through it, and our Pro plan includes both forms prepared by our US tax partner.

A C-corp's Form 1120 is a complete tax return with income, deductions and the 21% tax. Add Forms 1042 and 1042-S in any year it pays dividends to shareholders outside the US.

State costs: Delaware franchise tax vs yearly LLC fees

Delaware corporations file an annual report and pay franchise tax by March 1. The report fee is $50. The tax is at least $175 under the authorized shares method or $400 under the assumed par value capital method. A Delaware LLC pays a flat $400 tax by June 1 instead, and a Wyoming LLC pays a license tax of $60 minimum with its annual report.

Professional fees matter as much as state fees. If you'll issue shares to investors, budget for a startup lawyer. Compare every state's yearly LLC cost in LLC annual fees by state, or see Wyoming vs Delaware if you've settled on an LLC.

Raising money: why venture investors want a Delaware C-corp

Venture deals are built around stock. A SAFE (simple agreement for future equity), the contract Y Combinator created in 2013, gives an investor the right to shares of stock later and converts when you raise a priced round. Priced rounds are often sold as preferred stock, a class of shares with extra rights, such as being paid back first if the company is sold. An LLC has membership interests, not stock, so these documents don't fit it.

Pass-through tax also causes trouble for some fund investors. A tax-exempt investor, such as a pension plan, must count its share of an LLC's business income as unrelated business taxable income (UBTI), whether or not the LLC distributes it. A foreign investor in an LLC taxed as a partnership that runs a US business is treated as running that business itself, with US tax returns and withholding. A C-corp keeps that income inside the company.

Delaware adds corporate law and a business court that US investors and their lawyers know well. If you expect to raise a priced round in the next 12 months, start with a Delaware C-corp, or talk to a startup lawyer before you form anything.

QSBS: a big tax break that mostly helps US taxpayers

Qualified small business stock (QSBS, section 1202 of the tax code) lets shareholders other than corporations exclude gain on C-corp stock they received at original issue. For stock acquired after July 4, 2025, the exclusion is 50% after 3 years, 75% after 4 years and 100% after 5 years, generally up to $15 million of gain per company, or 10 times your basis if that's higher. The company's gross assets can't exceed $75 million.

The exclusion only helps if you'd otherwise owe US tax on the gain. A nonresident alien who sells shares in a US company generally has foreign-source gain that the US doesn't tax, with exceptions such as gains connected with a US business or spending 183 days or more in the US that year. Your home country may tax the gain, and QSBS doesn't change that. It's valuable for US co-founders, employees and investors.

Can you start as an LLC and convert to a C-corp later?

Yes. Delaware lets an LLC convert into a Delaware corporation by filing a certificate of conversion together with a certificate of incorporation, currently $184 plus the incorporation fee. Wyoming law lets any entity convert into another type of entity, including one in another state, so a Wyoming LLC can become a Delaware corporation too.

For US tax, the IRS treats an LLC taxed as a partnership that converts under a state conversion law as if it gave its assets to the new corporation in exchange for stock (Revenue Ruling 2004-59). Transfers to a corporation for stock are generally tax-free when the owners control the corporation right afterward (section 351). Debts, the way ownership is set up and your home country's rules can change the result, so plan the conversion with a US CPA and a lawyer.

There's a tax-only shortcut: an LLC can file Form 8832 to be taxed as a corporation. It stays an LLC under state law, though, so it still can't issue the stock that investors buy.

• Convert before a funding round starts, so investors review a finished corporation instead of a work in progress.
• Keep clean books from day one. A conversion moves everything the LLC owns into the corporation, and good records make that simpler.
• Founders in India: a conversion changes your overseas investment, so check the RBI reporting with your bank or Chartered Accountant first. See forming a US LLC from India.

Which should you choose?

• Bootstrapped SaaS, agency, freelancing or e-commerce run from India or elsewhere: an LLC. Compare states in the best state for non-residents.
• Raising from US venture funds or joining an accelerator in the next 12 months: a Delaware C-corp, set up with a startup lawyer.
• Profitable and paying most of the profit to yourself: usually an LLC, because C-corp profits are taxed at the company and again as dividends.
• Reinvesting everything for years, with US co-founders or investors: a C-corp can make sense, especially if QSBS applies to them.
• Not sure yet: an LLC now, converted later if investors ask for it.

Frequently asked questions