LLC vs C-Corp | Which US Entity Should a Foreign Founder Choose?

Everybody told you Delaware. Your lawyer said Delaware, the accelerator said Delaware, and the founder you met at a conference in Lisbon said Delaware. So you are about to incorporate in Delaware.

Nobody asked the question that comes first. Delaware what?

The state is the second decision. The first is whether you form a limited liability company or a C corporation, and for a founder who lives outside the United States, that choice has consequences no US-focused guide will warn you about. Most comparisons of these two structures are written for Americans, where the pass-through nature of an LLC is a straightforward benefit. Move the owner offshore and the same feature turns into a problem.

Should a foreign founder choose an LLC or a C-Corp?

For most founders based outside the US, a C-Corp. The deciding factor is not the tax rate. It is that an LLC is transparent for US tax purposes, so its income belongs to you personally, wherever you live. A C-Corp is opaque, which contains the US tax inside the company and keeps you out of it.

That single distinction drives almost everything below.

What happens when a foreign person owns a US LLC?

You become a taxpayer in the United States. Not the company. You.

An LLC with a single owner is disregarded for federal tax purposes, and an LLC with several owners is treated as a partnership. Either way the entity does not pay federal income tax itself. Its profits flow through to the owners, and the owners are the ones the IRS looks at.

If the LLC is carrying on a trade or business in the US, that income is effectively connected income, and a non-resident owner has to file a US personal return to report it. You will need a US taxpayer identification number, which for most non-residents means an ITIN. You may also pick up state filing obligations in each state where the business operates. Your personal tax affairs are now partly American, and they stay that way for as long as you hold the interest.

Founders are often told the LLC is the simple option. For a US resident it frequently is. For somebody living in Munich or Manchester, simplicity is the one thing it does not offer.

Get Started → Not sure which structure fits your plans? Talk to our team before you file anything.

 

What is Form 5472, and why does it hit LLCs hardest?

Form 5472 is an information return covering transactions between a US entity and its foreign related parties. Since 2017 it has applied to foreign-owned single member LLCs, and the penalties are severe enough to deserve their own section.

A foreign-owned disregarded entity has to file a pro forma Form 1120 with Form 5472 attached, even though the LLC itself owes no tax and files no real return. The IRS instructions are explicit about what happens if you do not: a $25,000 penalty is assessed on any reporting corporation that fails to file when due. If the failure continues more than 90 days after the IRS notifies you, another $25,000 applies for each 30-day period, assessed per related party. A substantially incomplete form counts as a failure to file.

Two practical traps sit inside this.

The return cannot be filed electronically. It goes by mail or fax to Ogden, Utah, which means it is easy for a foreign owner with no US accountant to assume it has been handled when it has not.

And the reportable transactions are broader than people expect. Capital contributions from the parent, loans, and payments for services between you and the LLC all count. An entity that “does nothing” still has reportable transactions the moment you fund it.

C-Corps face Form 5472 too when they are 25% foreign-owned. The difference is that a C-Corp is already filing a real corporate return with an accountant attached to it, so the form tends to get caught. A dormant-looking LLC set up online, with no US adviser, is exactly the structure that quietly accrues penalties.

The UK problem: why a US LLC can be taxed twice

If you are a UK resident individual, there is a further issue, and it is live right now.

The US treats an LLC as transparent. The UK has historically treated most US LLCs as opaque, taxing the member only on distributions. When the two treatments collide, you can be taxed in the US on the underlying profits and again in the UK on the distribution, with double taxation relief usually unavailable. Morgan Lewis puts the effective rate that can result at up to 75%.

The 2015 Supreme Court decision in Anson v HMRC found one Delaware LLC to be transparent for UK purposes, but it settled less than founders hope. It turned on that LLC’s specific operating agreement, and it left the general classification question unresolved.

The UK government consulted on fixing this during 2026, with the consultation closing on 31 July 2026. The proposal is to treat reverse hybrids as transparent for UK resident individuals, which would align the two systems and make relief available. Corporate members are excluded from the reforms as drafted.

The point for now is that the position is unsettled. Choosing a structure whose tax treatment depends on a pending consultation and a decade-old case about somebody else’s operating agreement is not a decision you want to make when a C-Corp raises none of these questions.

How is a C-Corp taxed, and is double taxation really a problem?

A C-Corp pays a flat 21% federal rate on its profits, plus state tax depending on where it operates. Profits distributed to you as dividends are then taxed again in your hands, which is the double taxation everyone warns about.

The warning is fair but usually overstated for early-stage companies, for two reasons.

Most young companies do not pay dividends. They reinvest. The second layer of tax is deferred until there is money going out, which for many businesses is years away or never, because the return comes through a sale instead.

And when dividends do flow, treaties cut the rate. The statutory withholding on dividends to a foreign shareholder is 30%. Under the US-UK treaty that falls to 15% on portfolio holdings, 5% where a company holds at least 10% of the voting power, and 0% at 80% or more where the limitation on benefits conditions are met. A UK parent company owning its US subsidiary outright is often in the 0% or 5% band rather than the headline 30%. The payer needs the right W-8 form on file before applying any reduced rate.

Worth knowing if you were considering a branch instead of a subsidiary: a foreign corporation operating through a US branch faces the 21% corporate tax plus a 30% branch profits tax under section 884, which treaties can reduce to 5% or zero. Our guide to which US tax return your entity files sets out how these map to forms.

Can a foreign founder use an S-Corp?

No. This one is absolute rather than a judgment call.

An S corporation is a tax election, not an entity type, and the eligibility rules are strict. The IRS states that shareholders “may not be partnerships, corporations or non-resident alien shareholders.”

If you are not a US person, the S-Corp is closed to you. Any adviser who suggests it either has not registered where you live or is thinking of a different client. It comes up often enough in founder forums that it is worth stating plainly.

When does an LLC actually make sense?

There are real cases, and it would be dishonest to pretend otherwise.

A single-member LLC held by your existing foreign parent company, rather than by you personally, avoids the individual filing problem. The parent takes on the US position instead of you, which some groups prefer for a small US operation.

A holding structure for US real estate is often an LLC, since the drivers there are liability and estate tax rather than trading profits.

And where the US entity is a cost center rather than a profit center, employing a few people and billing the parent for services, the pass-through characteristics matter much less than they would for a trading business.

What these have in common is that none of them involve raising US venture capital, and none of them put a foreign individual directly on the receiving end of pass-through income.

There is also one standard warning about LLCs that does not apply to you. American guides list self-employment tax as a major drawback of the LLC, because US members pay it on their share of the profits. The regulations are unambiguous that a nonresident alien individual never has self-employment income. A non-resident owner can carry on a US trade or business through an LLC, be liable for income tax on the profits, and still fall outside self-employment tax entirely. It is one of the few places where the general advice overstates the cost of an LLC rather than understating it.

What if you chose an LLC already?

Converting to a C-Corp is routine, and plenty of companies do it in the weeks before a funding round when an investor insists. Delaware and most other states allow a statutory conversion, so it is a filing rather than a rebuild.

The costs are real but manageable: professional fees, new governing documents, reissued equity, and a short period where nothing else gets done. The two things that genuinely hurt are timing and the QSBS clock.

Doing it under investor pressure means paying for speed, and because the five-year holding period runs from when the stock is issued, a conversion resets it. A founder who forms an LLC and converts three years later has given up three years of qualifying time without ever knowing the benefit existed.

None of that makes conversion a disaster. It makes it an argument for getting the choice right at formation, when it costs nothing.

Can an LLC give US employees stock options?

No, and for a company planning to hire in the US this is often the deciding argument.

An LLC cannot operate an employee stock ownership plan, grant stock options, or issue restricted stock, because its ownership is made up of membership interests rather than shares. The alternatives exist but none of them behave the way an American candidate expects.

Profits interests give a share of the growth in value from the date of grant. They can be tax-efficient when structured properly, but holders are treated as members rather than employees, which brings self-employment tax on attributable income, a K-1 instead of a W-2, and the loss of some employee benefits.

Capital interests are the closest equivalent to restricted stock, and are rarely used because the tax consequences at grant are uncertain.

Unit appreciation rights work like phantom equity, paying out in cash and taxed as ordinary income, with none of the capital gains treatment that makes options attractive in the first place.

This matters more than it looks. A US hire evaluating your offer against an American competitor’s will compare option grants, and explaining that you have profits interests instead is a conversation that loses candidates. If equity is part of how you intend to compete for US talent, the C-Corp is effectively the only workable structure.

What do US investors expect?

A Delaware C-Corp, and they will not usually be flexible about it.

US venture funds are largely structured so that pass-through income from an LLC creates problems for their own investors, particularly tax-exempt and foreign limited partners. Most funds will simply decline to invest in an LLC, and a company that has to convert mid-raise loses time and money at the worst possible moment.

There is also a benefit available only through a C-Corp. Qualified Small Business Stock under section 1202 lets founders and early investors exclude a large share of the gain on a sale, and it applies to C-Corp stock only.

The rules were expanded in 2025: for stock acquired after 4 July 2025, the exclusion is tiered at 50% after three years, 75% after four, and 100% after five, with the per-issuer cap raised from $10 million to $15 million and the gross assets threshold from $50 million to $75 million.

Founders forming an LLC because it looked simpler at incorporation have given up that benefit before they knew it existed. The holding period runs from when the stock is issued, so converting later starts the clock again.

So which should you choose?

One distinction worth drawing before you file. If you are starting fresh, the question above is the whole question. If you already run a company outside the US and are extending it rather than founding something new, there is a prior question about whether you need a US entity at all yet, and our guide to when and how foreign companies should set up a US subsidiary works through the triggers. Plenty of companies hire, sell and bank in the US for a year or more before incorporating becomes the right move.

Now that you have picked a type, which state?

The state question is the second decision, and it is less automatic than the Lisbon conference suggested. Delaware wins on corporate law and investor familiarity, but it is not the only sensible answer, and for a company whose operations sit entirely in one state it is sometimes the wrong one.

Our comparison of Delaware against other states sets out the trade-offs with a tax calculator. The individual guides cover the mechanics:

• Delaware, the default for anything venture-backed, and the one most investors expect to see
• Nevada, no state corporate income tax, popular with founders who will not be raising US venture money
• Wyoming, low cost and light administration, common for holding structures
• California, worth incorporating in only if your operations are genuinely there, given the $800 minimum franchise tax applies either way
• Florida against Delaware, the comparison that comes up most often for founders with a physical presence in the southeast

Whichever you pick, the process from there is the same, and our guide to registering a company in the USA covers it end to end. You will need an EIN before you can open a bank account or run payroll, and the annual filing obligations start immediately rather than in year two.

How Foothold America helps you choose and set up

We work exclusively with companies headquartered outside the United States, which means the foreign-owner angle is the only angle we deal with. The comparison above is the conversation we have with founders most weeks.

Our US Entity Setup service covers the decision as well as the filing: entity type, state, registered agent, EIN, and the annual obligations that follow. If your plans do not yet justify an entity at all, our Employer of Record service lets you hire US staff without forming one, which is often the right first step for a company still testing the market. Companies that already have an entity and want the people operations handled centrally use PEO+.

Get Started → Talk to our team about the right structure for your US plans.