LLC, S-Corp and C-Corp: What’s Best for US Expats?| Bright!Tax Expat Tax Services

Katelynn Minott, CPA & CEO Published: April 21st, 2024

Depending on your goals, the right business structure can help you reduce administrative burden, facilitate company growth, or shield you from personal liability — as well as have major tax benefits. If you’re a self-employed US expat, you may have wondered about the differences between the three most common options: LLCs, S corp and C corp.

Each of these types of business structures has its own pros and cons, and what’s a good fit for one person may not be for another. So how do you know which option is best for you?

The answer can be complex — but fortunately, we’re here to offer our knowledge and experience gained through guiding thousands of US expats through strategic business tax decisions.

Read as we review a few of the most common types of legal entities, including an overview of their benefits, potential drawbacks, tax implications, and more.

Types of business structures for US expats

The US government treats self-employed individuals as sole proprietors by default. As a sole proprietor, you are the only owner of an unincorporated (not officially registered) business.

The main benefit of a sole proprietorship is simplicity:

You don’t have to file initial business registration paperwork or pay associated fees
You can deduct business expenses
You file a standard personal income tax return

However, there are a few notable drawbacks.

Sole proprietors are subject to unlimited liability, meaning they are personally responsible for their business’s legal, financial, and tax issues. Creditors who sue sole proprietors may seize their personal assets (e.g. home, car, valuables) to recoup losses.

It may also not be the most efficient option from a tax perspective. Sole proprietors are subject to pass-through taxation, which allows them to file an individual tax return rather than a business tax return.

However, the Self-Employment Contribution Act (SECA) requires self-employed individuals to pay federal taxes of 15.3% (12.4% for Social Security, 2.9% for Medicare), sometimes called self-employment taxes, or social security taxes.

Related: Social Security for Self-Employed Americans Living Abroad

Self-employed taxpayers also must pay federal income taxes at standard rates from 10% to 37%, depending on total income. In some cases, they may incur income taxes not only at the federal level but also at the state level.

State income tax rates vary widely from as low as 0% (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming) to as high as 13.3% (top tax bracket in California).

Between liability issues and potential tax inefficiencies, many self-employed individuals choose to incorporate — or opt for formal business entities — at some point.

The most popular options include:

Limited Liability Company (LLC)

A limited liability company (or LLC) is a corporate and legal structure that helps shield the owners from personal liability. Freelance businesses, real estate businesses, consultant firms, and other small businesses often elect LLC status.

Read more: How to Start an LLC as a Digital Nomad: What to Know

Note:

LLCs can elect different tax statuses, the most common being the default pass-through taxation that we mentioned above. (As a reminder, this allows them to pay taxes on business income as if it were personal income). They can also choose S corp or C corp tax treatment.

Pros of forming an LLC

Liability protection: Creditors cannot seize an LLC owner’s personal assets even if the owner has debts, in most cases.
Flexibility: LLCs can have as few as one owner up to an unlimited number of owners. Owners can be individuals, corporations, or other LLCs.
Ease of creation: Creating an LLC is fairly simple. While filing requirements vary depending on which state you incorporate in, you typically just need to choose a name, file articles of incorporation and other relevant paperwork (e.g., DBAs, permit/license applications), sign an operating agreement and pay a fee.
Affordable to create: LLC filing fees vary by state but generally range from $40 (Kentucky) to $500 (Massachusetts). You may have to pay additional fees for operating agreements, DBAs, or any applicable licenses/permits, but these usually aren’t terribly expensive — especially if you file them by yourself. All in all, registration can cost as little as $150.
Ease of maintenance: Maintaining an LLC usually isn’t too burdensome. Most states require you to file annual reports and occasionally renew certain permits/licenses, but these processes are usually straightforward. LLCs also don’t require annual meetings or a board of directors.
Affordable to maintain: Maintaining an LLC doesn’t cost too much, either. The most common recurring expense is the annual report, which ranges from free (Arizona, Idaho, Minnesota, Mississippi, Missouri, Montana, New Mexico, Ohio, South Carolina, Texas) to $800 (California). In some cases, you may also need to renew license/permit fees.

Pro tip:

Registering and maintaining an LLC by yourself will save you money, but registered agent services like ZenBusiness or LegalZoom are cost-effective (typically $150-$300 per year) and do the heavy lifting for you. For additional savings, register your LLC in a state with low registration/maintenance fees and low-income tax rates.

Potential drawbacks of forming an LLC

Limited liability protection isn’t infallible: While LLC status typically protects owners’ personal assets, there have been rare cases in which creditors managed to seize them anyway.
Self-employment taxes: LLC owners who elect standard pass-through taxation must pay the 15.3% self-employment tax.
Ownership & turnover: Transferring ownership of an LLC can be difficult. Some states may even dissolve an LLC if a partner passes away or leaves.
Stock & shareholders: LLCs cannot issue stock and, therefore, can’t have shareholders (besides the owners).

Limited Liability Companies (LLCs) vs. Limited Liability Partnerships (LLPs)

Limited liability partnerships (LLPs) function similarly to LLCs in many ways. Both are flexible business structures created at the state level that shield owners from liability and allow them to elect pass-through taxation.

Here are a few key differences.

Number of members: As the “partnership” in limited liability partnership implies, an LLP must have at least two members, while an LLC can have as few as one (a single-member LLC).
Liability: LLPs don’t always offer as robust liability protection as LLCs, but partners in an LLP are typically not liable for other partners’ actions.
Nature of business: Professional service providers (e.g. law firms, medical practices, accounting firms) often choose to form LLPs instead of LLCs, sometimes due to the appeal of shielding themselves from the liability of their other partners’ actions or because a state requires these professions to form an LLP rather than an LLC.
Management responsibilities: One of the LLP partners must be a “managing partner” with the ultimate responsibility and liability for the business.
Taxation status: While an LLC can elect pass-through, C corp, or S corp taxation status, an LLP can only elect pass-through or C corp taxation status.
Fees & reporting obligations: In some states, LLPs must pay fees or file reports that LLCs do not have to.

The bottom line:

Most solopreneurs and small businesses find that creating an LLC/LLP is worth it. While it requires some minor upfront and ongoing costs and administrative effort, LLCs/LLPs offer legal protections that sole proprietorships/general partnerships can’t. If you’re a high earner, however, pass-through taxation could result in you leaving tax savings on the table.

S Corporation (S corp)

S corporations, or S corps, are corporations that are also pass-through entities. But rather than passing their taxable income along to the business’s owners, they pass it along to their shareholders.

They do this in one of two ways. The first by paying a “reasonable salary” to the shareholders, who are then responsible for taxes on that income. The second is through company profits which are allocated and taxable to shareholders as pass through income on their individual tax returns.

Pros of forming an S corp

Liability protection: Like LLCs, S corporations help protect the personal assets of their members (in this case, shareholders).
Potential tax savings: S corp salary income is subject to both ordinary income tax rates and 15.3% self-employment taxes, but passthrough profits are only subject to income taxes. S corps do not pay corporate income taxes. With high enough earnings, this can lead to significant savings.
Ease of transferring business assets: S Corp status allows for the sale of stock and simple property basis adjustment without triggering adverse tax consequences. Owners can also deduct losses in certain circumstances.

Potential drawbacks of forming an S corp

Administrative burden: Starting and maintaining an S corp is more involved than creating and maintaining an LLC. S corps must create a board of directors, draft corporate bylaws, hold shareholder meetings, record meeting minutes, and also administer payroll, among other tasks.
Cost: Given the complexity and tax implications of forming an S corp, it’s best to consult with tax advisors and tax attorneys beforehand. Once it’s up and running, you may be able to take on certain administrative tasks, but others will likely require outsourcing. All this adds up to additional overhead.
Restrictions on ownership & shareholders: S corps cannot issue more than one type of stock. Furthermore, shareholders cannot exceed 100 in number, and individual shareholders must be either US citizens or permanent residents. Certain US-based trusts/estates and tax-exempt organizations may also be shareholders.

The bottom line:

S corps usually require more money and work to create and maintain. But for high-earning US expats (~$80,000 to $100,000 per year or more), the tax savings often merit the additional effort. That said, S corp status may not be suitable for all high earners. The restrictions on the type of shareholders allowed and growth limits placed on S corps don’t lend themselves well to major scaling.

C Corporation (C corp)

C corps are also corporations but not true pass-through entities since the business itself is subject to corporate taxation on its earnings. On top of that, owners, employees, and shareholders are subject to taxation on the salaries and dividends they receive.

Pros of forming a C corp

Liability protection: C corps shield directors, owners, shareholders, employees, investors, and officers from personal liability so their personal assets cannot be seized if the business accrues debts.
Flexibility: C corps can have many different owners and shareholders and transfer ownership/change management in a more straightforward manner than other business types.
Attractive to investors: C corps’ ability to offer multiple classes of stock — including common stock vs. preferred stock — generally makes it easier for them to raise outside funds from venture capital firms, private equity investors, etc.
Potential tax savings: Corporate earnings are taxed at a flat rate of 21% vs. up to 37% under ordinary income tax rates. And while salaries are subject to both social security taxes and income taxes, dividends are only subject to income taxes.

Potential drawbacks of forming a C corp

Double taxation: While C corps pay corporate taxes on their earnings, their dividends are also subject to income taxes on the shareholder level.
Administrative burden: Creating a C corp tends to be more difficult than creating either an S corp or LLC/LLP. Like S corps, C corps must appoint a board of directors, draft corporate bylaws, hold shareholder meetings, record meeting minutes, administer payroll, and file payroll tax reports. They must also register with the Securities and Exchange Commission (SEC) when issuing securities and are subject to greater IRS scrutiny.
Cost: Again, C corps’ increased complexity lends itself to increased starting and administrative costs. Between tax advisors, attorney fees, payroll administrators, and other services, they can easily cost several thousand a year to start and maintain.
Deductions: Shareholders are unable to deduct business losses on their personal tax returns.

The bottom line:

Of the business structures we cover in this article, C corps are the most complex. They have strict operating, reporting, and eligibility requirements, and a greater administrative burden, which comes at an additional cost. That said, for very high earners — say, those making several hundred thousand dollars a year or more — who can get by primarily on salary vs. dividends, it may be worth it. Forming a C corp is also a good option for those who plan on significantly growing their company in the future. The ability to have unlimited owners, have unlimited shareholders, and issue preferential shares of stock often makes it easier to attract investors and even employees.

Tax forms & reports associated with different business structures

Here’s a brief guide to the different tax forms you may have to file according to your business structure:

Form Number	Purpose	Who Files It
Form 8832	Electing business structure/tax treatment	LLCs, LLPs, C corps
Form 1040	Reporting individual income	Sole proprietors, single-member LLCs
Form 1065	Reporting partnership income	Multi-member LLCs & LLPs
Schedule C	Reporting individual business P&L	Sole proprietors, single-member LLCs
Schedule E	Reporting supplemental income & loss	Multi-member LLCs, LLPs, S corps
Schedule K-1	Reporting partnership income, deductions	Multi-member LLCs, LLPs
Form 2553	Electing S Corporation status	S corps
Form 1120 S	Reporting income as an S corp	S corps
Schedule B-1	Reporting shareholder information	Certain S corps
Form 1120	Reporting annual corporate income	C corps
Form 1120-F	Reporting US-earned corporate income	Foreign-registered corporations
Form 1120-W	Estimating quarterly corporate income	C corps

Keep in mind:

This list is not comprehensive. It doesn’t, for example, include forms associated with payroll, employees, or salaries. To ensure you meet all compliance requirements, consult with a tax professional.

US expat-specific considerations

Up until now, we’ve covered the basics of business structures: pros, cons, and how they pay taxes. But for Americans living abroad, there are a few additional points worth considering.

Foreign vs. domestic registration

The information in this article refers specifically to US-registered businesses. Some expats may benefit from registering their businesses in another country instead of or in addition to the US.

However, that largely depends on an individual’s income, location, and priorities.

Digital nomads who move from country to country without staying long enough to become tax residents, for example, may benefit from registering their business in a low-tax country.

Someone with firm roots planted in another country, however, may choose to register their business there to receive local tax advantages.

The Qualified Business Income Deduction (QBID)

The Qualified Business Income Deduction, or QBID, is a provision included in the 2017 Tax Cuts and Jobs Act. It allows certain sole proprietors, LLCs, partnerships, and S corps to deduct up to 20% of their qualified business income from taxation.

S corps can only deduct 20% from their business income, though — not from the reasonable salary given to the shareholders. And if you’re the sole owner of an S corp, your salary often makes up 50% to 60% of your earnings.

In many cases, the savings you gain from not having to pay self-employment taxes on corporate profits are not enough to offset the loss of QBID on salary income.

As a result, it is sometimes more beneficial for high earners to remain LLCs/LLPs rather than “upgrading” to S corp status — but only if they live within the US. QBID is not applicable to foreign-earned income, so US expats generally cannot claim it.

For high-earning Americans abroad, that’s one fewer reason to avoid electing S corp status.

Foreign tax rates

If you are a tax resident of another country, you will likely have to pay foreign taxes on your US-sourced income.

However, owners of C corps registered in the US but living in another country where they are tax residents may only need to pay foreign taxes on dividends. Any business earnings not remitted to an individual may be subject to US taxes only.

If you:

a) live in a country with higher taxes than the US and

b) only remit a relatively small portion of your earnings to yourself

—it may make sense to register as a C corp in the US.

Example:

Jenna is a highly-paid consultant living in France, earning $300,000 per year. However, she calculates that she only needs $80,000 per year to live on. If her business was a US-registered LLC or sole proprietorship, she would be subject to a 45% tax rate on all $300,000 of her earnings. By forming a US-registered C corp and paying herself $80,000 in dividends, however, only that $80,000 is subject to taxes in France. Because the amount of taxable income is lower, the tax rate is lower as well (30%). The remaining $220,000 is taxed at US corporate income tax rates (21%) and kept in her business’s US-based financial accounts.

Tax treaties & credits

The US has multiple treaties with other countries that protect citizens and permanent residents of one country living in the other from double taxation. However, these treaties almost always contain a saving clause that eliminates most (if not all) of the benefits for American citizens.

In many cases, US expats are better off claiming one of the following tax breaks specifically created for Americans abroad:

The Foreign Tax Credit

The FTC gives Americans dollar-for-dollar credits on any foreign income taxes they have paid. They can then apply these credits toward their US tax bill. If you live in a country with higher tax rates than the US, the FTC usually completely eliminates your US tax liability and gives you surplus credits for the future.

The Foreign Earned Income Exclusion

The FEIE lets Americans abroad exclude some of their foreign-earned income from taxation. For tax year 2023 (aka the taxes you pay in 2024), you can deduct up to $120,000. For tax year 2024, that number increases to $126,500 to account for inflation.

Note:

As its name implies, the FEIE applies only to earned income. Passive income — including dividends from S corps or C corps — is not eligible.

To qualify for the FEIE, you must meet the Physical Presence Test or Bona Fide Residence Test. Doing so also qualifies you for the Foreign Housing Exclusion or Deduction, which you can use to help offset qualifying foreign housing expenses like rent and utilities.

Totalization agreements

Beyond income tax treaties, the US has a number of totalization agreements in place with other countries. These agreements prevent citizens and permanent residents of one country living in the other from having to pay social security to both countries. Among the countries with US totalization agreements are Canada, the UK, many EU countries, South Korea, and more.

In countries with totalization agreements, creating an S corporation may not be as worthwhile.

One of the major benefits of S corporations is reducing self-employment taxes, but a totalization agreement already exempts you from having to pay them. If you live in a country without a totalization agreement (e.g., Mexico), though, S corporation status could be very beneficial.

Someone with a US-registered LLC in Mexico would have to pay full social security taxes to both Mexico and the US. If they elected S corp status, they’d still have to pay full Mexican social security taxes — but they could significantly reduce their US social security taxes.

Reporting requirements for foreign financial assets & income

Living abroad may add to or change your reporting obligations. For example, Americans with a total of more than $10,000 in foreign financial institutions must file a Foreign Bank Account Report (FBAR).

Americans living abroad with more than $200,000 in foreign assets on the last day of the tax year — or more than $300,000 at any point in the tax year — must file Form 8938. Americans living within the states must file this form as well, but at a much lower threshold ($50,000 instead of $200,000, and $75,000 instead of $300,000).

Put your business in the hands of a trusted tax professional

As you can probably tell by now, taxes for businesses can be complex — especially for US expats. Choosing the right business structure, optimizing your tax strategy, and ensuring full compliance takes time and effort that many business owners simply don’t have.

But we do! See below how you can reach out:

LLC, S-Corp, & C-Corp: What’s Best for US Expats?