Guide 10 · The choice underneath the formation

LLC or corporation? The entity types, explained

Sethhost forms LLCs and corporations at the same published prices and recommends neither — that choice carries tax and fundraising consequences, and it is yours, with your advisers. But refusing to recommend is not refusing to explain. This guide lays out the structural differences, including the one rule that eliminates an option for many readers of this page: a nonresident alien cannot be an S-corporation shareholder.

The S-corporation bar, first and plainly

An S corporation is a corporation (or an LLC) that elects a pass-through tax status under Subchapter S of the Internal Revenue Code. The election has eligibility rules, and one of them is absolute: under IRC §1361, an S corporation may not have a nonresident alien as a shareholder. If you are a non-US person who is not a US resident for tax purposes, you cannot own an S corporation — not directly, and an election made anyway does not hold. Any guide or salesperson offering a foreign founder an “S-corp to save on taxes” is offering a structure the Code closes to you. The realistic US choices for a nonresident founder are the LLC (in its default classification or electing corporate treatment) and the C corporation.

The LLC, in its default form

An LLC is a state-law entity whose federal tax treatment follows its membership. The default classifications:

• Single-member LLC: disregarded. The IRS treats the company as inseparable from its owner for income-tax purposes. A foreign-owned single-member LLC still files every year: a pro-forma Form 1120 with Form 5472 attached, reporting transactions with the owner — due April 15, extendable to October 15 with Form 7004 — even in a year with no income. The penalty for that filing starts at $25,000, which is why it is calendared from day one here.
• Multi-member LLC: partnership. Add a second member and the entire federal picture changes. The LLC files Form 1065, issues a Schedule K-1 to each member, and the members report their shares. Where the partnership has effectively connected income, §1446 withholding can apply to a foreign partner’s share — the partnership withholds and remits, with its own forms and deadlines. Two-founder teams should take tax advice before the second member is added, not after the first K-1 surprises them.
• Elective classification. An LLC can elect to be taxed as a corporation on Form 8832. That election trades the partnership or disregarded regime for the corporate one below; it is a tax filing with lasting consequences, made with a preparer, not a formation upsell.

The C corporation

A corporation is its own taxpayer from birth. A C corporation pays federal corporate income tax at a flat 21% and files Form 1120; a corporation that is 25% or more foreign-owned also files Form 5472 for its reportable transactions with foreign related parties. Money taken out as dividends is taxed again on the way out, with withholding on dividends paid to foreign shareholders — the “double taxation” textbooks describe, and the price of the structure investors are built around: shares that can be issued in classes, options, and a governance record venture funds expect. A corporation also carries the heavier state layer in some states — Delaware’s franchise tax, computed under its two methods, is the standing example in our state comparison.

Member-managed or manager-managed

Separately from tax, every LLC records how it is run. In a member-managed LLC, the members themselves manage the company and can bind it. In a manager-managed LLC, management sits with appointed managers — who need not be members — and members act as owners rather than operators. The choice is stated in the formation filing in some states and in the operating agreement in all of them, and banks, marketplaces, and counterparties ask which one your company is. It changes nothing about the tax classification above; it is about who can sign, who can commit the company, and what the public record says.

The honest summary

Which of these is right depends on where the owners are taxed, whether investors are genuinely coming, and what the company will actually do — facts a guide cannot know about you. That is why Sethhost states the structures and never steers the choice: bring this page to a tax preparer or attorney who knows your situation, and tell the intake the answer.