In our Expanding to the USA (Part 2) blog post we discussed that many Australian companies and entrepreneurs set up their US operations by using an Limited Liability Company (an LLC). However they are often later surprised to find out that the LLC is treated like a partnership under US tax law and also as partnership under Australian law if the foreign hybrid rules apply.
The alternative to establishing an LLC, which we think is commonly overlooked, is for Australian business and entrepreneurs to establish a C-Corporation. The name stems from the fact that a C-Corporation is governed by subchapter C of the Internal Revenue Code.
In many respects the C-Corporation in America works exactly like an Australian Private company.
The C-Corporation has directors, shareholders (stock holders) and has its own tax identity that is separate from its stock holders. By default it is taxed as an entity, keeping profits and taxation separate from the stock holders until such time as a dividend is declared by the corporation. Tax is payable at US Federal Rates (graduated rates between 15%-39%) but state income tax may also apply depending upon the state of incorporation and where business is carried on. As compared to a flow through LLC the C-Corporation is a simply structure because US tax filings are not required to be made by Australian shareholders.
In the case of Australian resident shareholders owning a C-Corporation, when dividends are declared, a dividend withholding tax arises on the dividend paid. This means that Australian shareholders will receive a dividend paid to them net of US withholding tax. If the reduced tax treaty rate applies then that dividend withholding tax can be reduced to 5% in certain situations.
Depending on a client’s situation in Australia, a C Corporation may be the appropriate US business structure.
CST focuses on advising clients with international tax issues, many of whom expand into and invest in the United States.