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Before the appearance of the most popular type of company in the USA - the Limited Liability Company (LLC), the corporation used to be the main vehicle for incorporating a business in the USA. The corporation is a business structure, created in the form of a joint-stock company, analogous to the German ÀG, the Spanish S.A., or the Italian SpA.
The official name of this type of company - Ñ Corporation - indicates that taxation of these business structures takes place according to subchapter ''Ñ'' of the Internal Revenue Code of the USA. Unlike an LLC, a C Corporation is taxed at the company level, according to the rates of corporate income tax in force in the USA, and irrespective of where the taxable income is derived.
Thus, according to the tax legislation of the USA, all the profits of a Ñ Corporation, irrespective of the State of its incorporation, are subject to corporate taxation, even if these profits are earned wholly outside the USA.
It therefore follows that the owners of American companies from Delaware, who believe their company to be automatically tax-exempt due to the fact that it was incorporated in this "tax-free" state, should be warned that this is not the case. In fact, there are no tax-exempt States or administrative areas in the USA, as such. The taxation of American Ñ Corporations incorporated in the State of Delaware, and in any other States for that matter, is regulated by federal (common) legislation. According to this legislation, the income of a corporation, irrespective of its State of incorporation, is subject to taxation at a variable rate of between 15% and 39%, irrespective of where its income has been derived.
Therefore, the owner of an American corporation who wishes to transfer his or her business operations to an effective tax-free vehicle, while continuing to preserve US incorporation, has only one option - to convert (reregister) his or her corporation into an LLC (where this is not prohibited by the legislation of the specific State), or to transfer the business to a new company, formed as an LLC.
The following table provides comparative characteristics of both a C-Corporation, and the most popular type of US company - the LLC:
| Criterion | C-Corporation | Limited Liability Company | | Owner of the company | Shareholders | Members | | Liability of the owner | Limited | Limited | | Number of owners | One or more | One or more | | Taxation | The company is liable for tax according to existing corporate rates (15-39%), irrespective of the place of derivation of the income. | The company is not liable for tax. Tax is paid by the members at the rates applicable to them individually. | | Who manages the company? | Director | 1) Members if it is a member-managed LLC,
or
2) An individually appointed manager if it is a manager-managed LLC. | | What happens on the death or incapacity of the owner/s? | No consequences. | No consequences. | | Possibility of conversion into another form of business entity. | Possible depends on the specific State. | Conversion into a General Partnership, a Limited Partnership or a Corporation is possible. |
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