LLC or C-Corporation for a founder outside the United States

A single-member LLC is a disregarded entity: the IRS looks through it to you. The US taxes a foreign owner only on income effectively connected with a US trade or business, and on some US passive income such as royalties. Selling services or software to Americans from your desk abroad usually isn't a US trade or business, so the LLC files Form 5472 with a pro forma 1120 each year and pays no US income tax. The full test explains where that line sits.

You also pay no US self-employment tax, the social security charge US freelancers pay on their profit. The IRS says non-resident aliens aren't subject to it unless a social security agreement with their country covers them. Your own country then taxes the profit the way it taxes your other income, so a profitable LLC run from abroad is usually taxed once, at home.

A corporation is its own taxpayer. It files Form 1120 and pays 21% federal tax on its profit, wherever its owner lives. When it pays you a dividend, it withholds 30% for the IRS, or the lower rate in your country's tax treaty after you give it a W-8BEN. That's the double layer people mean: tax on the profit, then on the dividend.

In practice it bites less than it sounds for a startup. A company spending everything on growth has little profit to tax and pays no dividends. Salary paid to you for work done abroad is a business expense, and isn't US income for you. And when you sell your shares, the US generally doesn't tax the gain if you spent fewer than 183 days in the country that year, unless the company mostly owns US real estate.

A SAFE converts into shares, an option plan grants shares, and a term sheet prices shares. An LLC doesn't have shares. Venture paperwork is written for Delaware corporations, so an investor asked to fund anything else will usually ask you to convert first. Funded startups also tend to run at a loss for years, so the corporate tax rarely bites. A Delaware corporation costs about $450 a year to keep. Raising from US investors and SAFEs explained cover the rest.

• Canada. The Canada Revenue Agency treats a US LLC as a corporation, while the IRS looks through it to the owner. That mismatch can mean tax in both countries without full credit. Canadian founders usually do better with a corporation, or a Canadian company with a US subsidiary, and should get advice before forming an LLC. The Canada page.
• Other countries that treat a US LLC as a company, including the United Kingdom in most cases. The LLC's profit may not count as yours until it's paid out, and treaty relief may not work the way you'd expect. A C-Corporation, or a company at home, can be simpler. Ask a tax adviser in your own country.
• A US office, US staff or a US warehouse. Then the LLC probably has a US trade or business, and you'd file a US return and pay US tax on that income either way. The tax case for the LLC shrinks.
• A profitable business that may raise later. Form the LLC now and convert when an investor is actually ready. Conversion works, it costs legal fees, and most companies never need it.
• S-Corporations aren't an option. The IRS bars non-resident aliens from owning shares in one, whatever a sales page suggests.

A Wyoming LLC can convert into a Delaware corporation by statutory conversion when an investor asks. Expect lawyers' fees, filing fees in both states and a few weeks. Converting to a Delaware C-Corporation walks through it. If you already know you'll raise within two years, forming the corporation now is usually the cheaper route. If you're still deciding on a state, Wyoming or Delaware compares them.