I, along with two other partners, intend to register a company in Delaware. However, we need to decide between an LLC and a Corporation stru...

Question

I, along with two other partners, intend to register a company in Delaware. However, we need to decide between an LLC and a Corporation structure. Non of the three partners are US citizens and we

already formed a company in Grenada (in the caribbean). The US company's initial focus will be on mobile airtime retail/remittance whereas the Grenadian company will provide marketing services to

the US company. For the US company we need two classes of shares. One class with voting rights and another for without voting rights. In addition to this the US company should only pay taxes on

profit (not all income). Which should we choose?

Answer

You can have two classes of ownership (shareholders for a corporation and members for an LLC) with either form. A corporation pays taxes on net profit that is not distributed to the shareholders. That rate is higher than the individual rate, so that can create a financial disincentive to form a corporation because the corporation may need to not distribute all its profit at the end of the year so it has working capital going forward. The net profit of an LLC is attributed as income to the member/owners, regardless whether it is distributed, and is not taxed to the company. This avoids the double taxation (company and individual) situation that can be an issue with corporations.

All the above statements concern federal taxation. Delaware does not tax income if the company is just organized here but is not conducting business in Delaware. There is a Delaware annual franchise tax for corporations and annual fee for LLCs. In simple terms, the annual cost would be $225-$250 for any LLC or a corporation with 10,000 authorized shares.

Besides filing to set up the company in Delaware, you will need to obtain a TIN (Taxpayer Identification Number) for the company. As all of you are non-U.S. citizens, the person applying for the TIN first will have to obtain an ITIN (Individual Taxpayer Identification Number).

Feel free to contact me directly if you want to discuss this further.

Answer

I agree with my colleague. Let me also note that if you are looking to further sell equity, issue options or bring in investors then generally speaking a corporation is a more suitable form than an LLC. If on the other hand the partners are going to change from the initial group of partners then an LLC could be a viable option, which would for the most part eliminate the problem of double taxation that exists for many corporations.

I realize that you are looking for an advice without incurring a fee, however realistically your needs and complexity of the corporate structure you are proposing require an attorney to help you along. If you are investing a substantiual amount of money and effort in the venture you should consider retaining a startup attorney.

My practice is entirely dedicated to startups and entrepreneurs with many of them foreign entrepreneurs who are setting up operations in the US. My fees for startups are significantly discounted for the first 18 months of existence so the startups don;t don't encouter large legal bills at a time when money is very tight.

Please contact my office as soon as possible.

Roman R. Fichman, Esq.

www.TheLegalists.com │ @TheLegalist

email: Info (@) TheLegalists (dot) com

t e l : 2 1 2 -- 3 3 7 -- 9 8 3 7

Disclaimer: This post has been written for educational purposes only and was not meant to be legal advice and should not be construed as legal advice or be relied upon. No intention exists to create an attorney-client relationship or any other special relationship or privilege through this post. The post may contain errors, inaccuracies and/or omissions. You should always consult an attorney admitted to practice in your jurisdiction for specific advice. This post may be deemed as Attorney Advertising.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein.