Introduction to Common Types of American Companies

There are two common forms of corporate organization in the United States, namely Corporation and LLC (that is, Limited Liability Company, generally translated as Limited liability company). Among them, Corporation can be further classified into C Corporation (named so because it is applicable to Chapter C) according to the different chapters of the Internal Revenue Code it is in. It can be abbreviated as "C Corp" and S Corporation (as it is applicable to the S section, it can be abbreviated as "S Corp").

1.The similarities and differences between LLC and Corporation

LLC and Corporation are both independent legal entities. If we borrow the concept of Chinese law, they both belong to the subjects of legal formulation.

In contrast, one of the advantages of an LLC is that it is more flexible at the level of corporate governance. An LLC does not need to hold annual shareholders' meetings and board meetings like a Corporation. An LLC can be directly managed by its owners (similar to shareholders, generally referred to as the members of the LLC), without the need for directors to be elected by shareholders for management at least formally as in a Corporation. Of course, an LLC can also choose to be managed by a manager, and the manager himself/herself does not have to be a member of the LLC. The allocation of the management authority of an LLC is usually clarified in the Operating Agreement of the LLC.

Furthermore, by default, at the federal level, the LLC itself does not need to pay taxes. The income and losses of an LLC are directly borne by its members, meaning that the LLC has only one tax burden.

However, regardless of whether the profits of an LLC are actually distributed to its members or not, members must pay income tax on their due share of the profits. In practice, this will vary depending on whether the LLC has only one member or multiple members.

At the federal tax level, if an LLC has only one member, the LLC is treated as an "ignored entity" (disregarded entity) whose income and expenses are recorded directly on Schedule C of the owner 's individual income tax return (Form 1040). If an LLC has multiple members, the LLC will be regarded as a partnership and is required to submit the "Partnership Income Return Form" (Form 1065) and provide each member with the "Schedule K-1" of Partners' Income shares. Members report their profit shares based on K-1 and pay taxes in their personal income tax returns. However, if the LLC wishes to retain more profits without distribution and does not wish to pay taxes on this portion of profits. Then the LLC can actively choose to be taxed as a C corp or an S corp.

At the state law level in California, every LLC is required to pay the Annual Franchise Tax, with a fixed amount of $800 per year. Furthermore, for a specific LLC, if its California total income [1] reaches or exceeds $250,000, further LLC fees [2] also need to be paid.

2.C Corp and S Corp

The company laws of each state do not distinguish between C Corp and S Corp. In practice, when choosing to adopt the organizational form of C Corp or S Corp, tax considerations will play a major role.

C Corp is similar to a domestic limited liability company when paying taxes. Firstly, the company itself needs to pay taxes. Secondly, if the company distributes dividends to shareholders, the shareholders also need to pay taxes, that is, there is a problem of double taxation. S Corp does not have the problem of double taxation. The company itself does not need to pay taxes, and the tax burden is directly borne by the company's owners.

However, while S Corp enjoys tax benefits, its shareholder status is also subject to strict restrictions, which do not exist in C Corp and LLC (unless LLC chooses to be taxed as S Corp). The existence of restrictive conditions will result in S Corp itself not being very suitable for international investors

Specifically, first of all, the shareholders of S Corp must be U.S. citizens or U.S. residents, and cannot be entities such as companies, partnerships or LLCS [3]. Secondly, the number of shareholders of S Corp cannot exceed 100 [4]. Finally, except for issuing stocks with different voting weights, S Corp has no right to issue other different types of stocks (including but not limited to preferred stocks). The existence of these restrictions makes it difficult for S Corp itself to develop into a large company. Relatively speaking, it is a more suitable choice for small companies or family businesses.

3. Conclusion

To sum up, Corporation and LLC each have their own institutional advantages and applicable scenarios. When deciding which type of company to establish, a comprehensive consideration should be made by taking into account multiple factors such as one's own business needs, tax planning, corporate governance arrangements, and shareholder structure. For small and medium-sized enterprises or start-ups that wish to maintain flexible governance and transparent tax burden, LLC is often a more convenient choice. For enterprises that plan to raise funds, expand or go public in the future, Corporation, especially C Corp, may be more appropriate. It is recommended that before officially establishing a company, you consult legal and tax professionals in light of specific circumstances to make a decision that best serves your own interests.

Footnote:

[1]. It refers to the total income from all sources in California, without deducting any fees or expenditures, and must include the direct costs paid or incurred by the taxpayer in its business or operating activities for the production or sale of goods or services, such as raw materials, labor, etc.

[2]. When the California total income of an LLC reaches or exceeds $250,000:

If it is $250,000 - $499,999, then the LLC fee is $900.

• Ranging from $500,000 to $999,999: Then the LLC fee is $2,500;

• Ranging from $1,000,000 to $4,999,999: Then the LLC fee is $6,000;

• For $5,000,000 and above: Then the LLC fee is $11,790.

[3]. There are some exceptions. For example, some types of trusts and some non-profit organizations can become shareholders of S Corp.

[4]. During such calculation processes, if several family members hold shareholders of S Corp, these several family members will be combined and counted as one shareholder. When calculating "family members", it includes not only couples but also those who share a common ancestor, the direct descendants of these common ancestors, and their spouses, as long as the generational gap between the common ancestor and the youngest shareholder does not exceed six generations. For example, suppose the youngest shareholder is Xiao Li (25 years old), and his great-grandfather, that is, the father of Xiao Li's grandfather, is Lao Li. Then: 1. All of Lao Li's children (i.e., Xiao Li's great-uncle/great-aunt) 2. Lao Li's grandchildren (including Xiao Li's grandparents and his siblings) 3. 1. Old Li's great-grandchildren (i.e., Xiao Li's parents and his Cousins) \ n2. Old Li's great-grandchildren (Xiao Li himself and his siblings) \ n3. Old Li 'S great-grandchildren (if any, children of young Li) 6. Old Li' s 晜 grandchildren (children of children of young Li) within exactly six generations above can be included in the "family" with "Old Li" as the common ancestor, provided other S corp eligibility requirements are met (such as being a U.S. citizen, etc.) and can be combined into one person in the shareholder count. If Lao Li has another father, namely Xiao Li's great-grandfather (the 7th generation), then he cannot be regarded as a common ancestor to combine family members.