C-Corp or Transparent LLC in the U.S.: What Should Ukrainian Businesses Choose?

This article dives into the most pressing questions covered in the second part of our webinar on the U.S. tax system: when a C-Corp is the better option, how to avoid being hit with “effectively connected income” (ECI), and why IRS Form 8832 isn't as scary as it sounds.

It turns out that one webinar isn’t enough to unravel all the nuances of doing business in the U.S. The first session laid the groundwork — introducing business entity types, LLCs, nonresident taxation, and risks for entrepreneurs. But the real traps lie in the details, which we explored in the second session. If you believe that an LLC is always simple and advantageous, and that a C-Corp is only for big players — you may want to wait for the conclusions.

Transparent or Opaque: Why It Matters

In the U.S., legal entities are classified as either pass-through (transparent) or opaque structures. In transparent structures, the company doesn’t pay income tax itself — its members (such as partners) do. The most common example: an LLC.

In opaque structures, like a C-Corporation, the company itself pays income tax, and then shareholders also pay tax on dividends.

Sounds like double taxation? It is. But C-Corps have distinct advantages.

LLC: Flexible but Risky

LLCs are often chosen as a convenient starting point for small businesses. They’re tax-transparent, so the income flows through to the owners’ personal tax returns.

But there are serious caveats:

If an LLC has a single nonresident owner who fails to file required forms, penalties can reach $25,000 per missed form.
All members must obtain a U.S. Tax Identification Number (ITIN) — even if they reside in Ukraine.
The biggest risk? The IRS may classify your revenue as Effectively Connected Income (ECI) or FDAP — subject to U.S. tax on gross revenue, without deductions.

This could result in a catastrophic tax burden, especially for tech businesses operating from abroad.

When a C-Corporation Is the Safer Bet

It’s no surprise that many entrepreneurs choose the C-Corp structure. Yes, it pays a federal corporate income tax of 21%, plus potential state-level taxes (e.g., 9–10% in New York or California). But in return, you get:

Protection from ECI and FDAP
A C-Corp acts as a buffer. Income flowing through it is not automatically considered U.S.-connected, and expenses can be deducted, which is critical in service or tech industries.
Investor Confidence
Foreign shareholders in a C-Corp aren’t required to file U.S. tax returns, unlike LLC members. This is often a deal-breaker for investors.
Reputation and Scalability
A Delaware-registered C-Corp is the standard for venture capital. Its legal status is solid and allows for complex holding structures.
Proof of U.S. Tax Residency
Foreign partners and clients often demand confirmation that a business is a U.S. tax resident — something an LLC can’t provide, but a C-Corp can.

Tax Benefits: Lowering the Rate to 13.125%

Despite the 21% headline rate, there’s a major benefit: the FDII deduction (Foreign Derived Intangible Income). It allows eligible income to be taxed at just 13.125% (until 2026).

Even though the name suggests it’s only for IP-based income, companies selling goods or services outside the U.S. may also qualify.

To use it, you must:

Show that the product/service is used abroad;
Prove there's no resale in the U.S.;
Properly allocate your business expenses.

$1M profit = $131,250 in tax instead of $210,000. But there’s a catch.

Risk Alert: Foreign “Permanent Establishment”

If your CEO lives abroad — say, in Spain — and manages the company from there, part of the income may be classified as earned by a foreign permanent establishment. That portion won’t qualify for the reduced FDII rate and may be taxed at 21% instead.

The IRS requires proportional income allocation between jurisdictions.

Can an LLC Become a C-Corp?

Yes — and this is a key tip. You can elect for your LLC to be treated as a C-Corp for tax purposes by filing Form 8832.

This:

Doesn’t require forming a new company;
Doesn’t trigger additional taxes upon transition;
Unlocks access to the benefits and credibility of a C-Corp.

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Criterion: LLC (Pass-through), C-Corp (Opaque)

Double Taxation: No, Yes

Tax Reporting by Foreign Members: Required, Not required

FDII Deduction: No, Yes

ECI/FDAP Risk: High, Low

VC and Startup Credibility: Moderate, High

U.S. Tax Residency Certificate: No, Yes

Side-by-Side Comparison

Conclusion: What Should Ukrainian Businesses Choose?

If you’re just starting out or freelancing, an LLC may be a good fit.
But if you:

Plan to raise investment;
Earn significant income from U.S. clients;
Want to avoid tax pitfalls;
Seek legal protection and scalability —

Then the C-Corporation is likely your best option.

Reminder: The U.S. tax system is unforgiving to mistakes, but full of opportunities for those who understand the rules.

Don’t Miss Out!

If you haven’t seen the first part of the webinar, now is the time to catch up. The second part is already available on our YouTube channel.

Have questions? Message us or leave a comment — we reply to everything.

Want to get practical guidance on doing business in the U.S. as a Ukrainian founder?
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How to Pay Taxes in the USA Correctly? AVITAR & iFindTaxPro

How to Pay Taxes in the USA Correctly? AVITAR & iFindTaxPro (Part II)

How to Pay Taxes in the USA Correctly? AVITAR & iFindTaxPro (Part III)

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