Holding Company in the U.S.: C-Corp or LLC?

In the world of startups and venture capital, choosing the right legal structure for a holding company is crucial. A mistake or bad advice from an inexperienced lawyer can expose you to legal risks and costs that could kill your startup or cost you and your investors a lot of money at exit. 

That’s why this content from SLLM covers the 2 most popular types of companies (LLCs and C-Corps) for Latin American startups that need an international holding company and subsidiary structure for their operations.

 In the United States, two types of entities are commonly used for this purpose: the LLC (Limited Liability Company) and the C-Corp (Corporation). Both options have different advantages, disadvantages, and legal considerations. In this article, we hope to provide you with a guide to help you ask the right questions and choose the best option for your startup. 

‍Holding companies for Latin American startups in the United States

In the United States of America, two types of entities are commonly used to establish a holding company as a Latin American founder: 

1. LLC (Limited Liability Company) 
2. C-Corp (Corporation)

For both structures, Delaware is the most popular jurisdiction. You’ll need to choose one or the other depending on your goals and your startup’s business model.

Delaware: the state for incorporating startups

You may be wondering, “Why don’t startups incorporate in California?” After all, Silicon Valley, one of the world’s most important startup hubs, is located there. 

For context, Delaware is one of the 50 states of the United States of America, located in the country’s northeast. It is the second-smallest state, after Rhode Island, and also one of the least populous. Because of these 2 characteristics, the state government decided to adopt the following policies to attract more investment to the state

Advantages of Delaware

It is a corporate offshore jurisdiction where the law allows tax exemptions for limited liability companies (LLCs) owned by nonresident foreigners, provided they do not operate within the state. Subsidiaries of holding companies are exempt from taxes, which is why many corporations establish their headquarters in Delaware and their operating subsidiaries in other states. 

However, Delaware’s tax benefits are not the only reason the state has attracted so many foreign companies. The second feature that makes this jurisdiction attractive is corporate secrecy. Corporate secrecy is not unique to Delaware; it also exists in other states, such as Wyoming. This policy requires the state to keep a company’s private information confidential. 

Finally, the third feature that makes this state so attractive is its corporate law, which the state legislature has worked to develop. In particular, the “General Corporation Law” is the most developed corporate law in the United States. 

LLCs for Latin American startups

With this first option, startups form a Delaware LLC (Limited Liability Company) as a holding company and a Latin American operating subsidiary.

Advantages of an LLC

1. Avoid double taxation. An LLC is considered a “pass-through” entity. This means it is a legal entity whose income “flows through” to its investors or owners; in other words, the entity’s income is treated as the income of its investors or owners. The company’s income and losses are reported on the partners’ personal tax returns, rather than being subject to corporate taxes, because the tax liability passes through to the individuals behind the business.
2. It is an ideal preliminary step toward a Cayman Sandwich.
3. They can be converted into C-Corps in the future.
4. Efficient if you plan to raise $300K USD or more.
5. Flexible structure thanks to the Operating Agreement, which allows the rules for decision-making and distributions to be established freely.
6. You can issue voting and nonvoting units, as well as units with or without economic rights, in any combination required.

Disadvantages of an LLC

1. They cannot go public through an IPO.
2. They are not suitable for operating in the U.S.
3. Flexible transfer of assets/units.
4. They are not suitable for selling common shares to investors (LLCs have membership interests, not shares).
5. They make it much more difficult to implement incentive plans for employees or key contributors.

C-Corps for Latin American startups

A C-Corp (Corporation) is a form of business organization in which the owners hold shares in the company and their financial liability is limited to the shares they own.

Advantages of a C-Corp

1. Separation of ownership and management. Shareholders = owners of the company. Directors and managers = responsible for day-to-day management.
2. Limited liability. Shareholders are liable up to the value of their shares. Their personal assets are not at risk.
3. Flexibility in the structure and rights of shareholders. These are issued and specified in the Bylaws and the Shareholder Agreement.
4. Flexibility. C-Corps have the flexibility to develop business strategies (such as issuing bonds and merging with other companies).
5. It is the ideal structure for implementing an ESOP.
6. Ease of transferring shares
7. Capitalization. A C-Corp can raise capital from multiple sources, including by issuing shares, taking out loans, and using other forms of financing.
8. Ideal for an IPO in the short to medium term.
9. It works for raising capital in every round.

Disadvantages of a C-Corp

C-Corporations pay taxes separately on their profits, then on salaries and dividends paid to shareholders. This means that income is taxed before the shareholder has to pay any applicable taxes (e.g., the shareholders’ income tax).

Legal complexity. The C-Corp corporate structure is more complex to comply with than an LLC, including the need to keep rigorous accounting records and meet regular reporting and audit requirements.

Regulation. C-Corps are subject to extensive government regulation, including shareholder protection, transparency, and compliance regulations.

Which type of company is right for me: an LLC or a C-Corp?

In conclusion, although an LLC may seem more beneficial at first glance, it is important to assess your startup’s goals and stage, as well as its investors’ profiles, to determine which of the two vehicles is right for you. It will also be essential to consider whether you plan to implement a Cayman Sandwich in the future, pursue an IPO, or conduct business in the U.S.

Always remember to seek advice from a lawyer specializing in venture capital who understands your country’s context and business model, as well as a tax attorney and an accountant, so you can make an informed and responsible choice.