Should you form a business LLC or Inc.? Before you decide, you should thoroughly understand what each option means. 

  • An LLC, or limited liability company, offers protection for personal liability and assets, and also offers some tax advantages.
  • A corporation also offers limited liability. However, the way profits are distributed is different, as are taxes and legal requirements.

Similarities Between LLCs and Corporations

LLCs and corporations have a lot in common, such as:

  • Both require forms to be filed with the state in order to form them.
  • Both protect owners and their assets from liability. 
  • Both must follow the laws of the specific state where they were formed.
  • Both must keep records and issue reports that vary depending on the state where they were formed and in which they operate.

LLC Advantages

One advantage is that an LLC can have an unlimited number of owners, or members. The business' profit or loss is passed through to the members, rather than the business itself paying its own taxes. LLCs do not need to hold annual meetings or keep minutes of meetings. 

Corporation Advantages

A corporation can issue stock in order to raise operating capital, while an LLC does not have that ability. Furthermore, this stock can be divided into different classes, such as preferred or common stock, which allow for different levels of dividends as well as other privileges. C corporations can accumulate earnings from year to year, while LLC members must pay taxes on all profits even if they stay in the business bank account.

Corporation Disadvantages

One big disadvantage of a corporation is that double taxation takes place on its profits. However, this applies to C corporations. S corporations do not have this burden because they are pass-through entities like LLCs. However, both types of corporations must hold annual meetings and record minutes. S corporations have many restrictions on the number of owners they may have, and cannot issue more than one level of stock.

Liability Protection

What does limited liability mean? Owners of both LLCs and corporations have their assets protected from personal liability from lawsuits or debts that involve the business. If you own one of these business entities, your personal assets such as your house, car, etc. remain safe in the event of a lawsuit or the collection of a business debt. Of course, any money you have invested in the business may be lost.

Profits and Management

The management structure of corporations is standardized with little flexibility. Every corporation must have a board of directors, must be run by officers to oversee its day-to-day operation, and must have shareholders. Corporation shareholders meet every year, and the company's profits are disbursed to them depending on the amount and level of stock they own. Ownership of a corporation's stock can change easily because shares are simply transferred by buying and selling them.

Unlike corporations, LLCs are not required to use any one type of management structure. Their owners, or members, can manage them, or they can be managed by a group of appointed managers. Nobody is required to have a specific job title. In fact, small LLCs that are managed by their members can be very flexible and informal. Profits can be distributed any way members want, no matter what percentage of the company each member owns. Unlike corporations, however, ownership is difficult to transfer to new owners if one decides to leave.

Which Should You Choose?

There is no one answer about which structure is best; it depends on your priorities and goals. Investors prefer corporations because of the management style and the ease with which shares may be transferred. If you have a small business that is not interested in raising capital from outside sources, you might prefer the LLC's informal and flexible structure.

Tax Considerations

LLCs, S corporations, and C corporations are treated differently by the IRS. A C corporation pays its own taxes on its profits. Stockholders who receive their share of these profits also pay taxes on their own personal return. This results in double taxation, one disadvantage of having a corporation. S corporations do not have this problem, as all profits pass through to their shareholders.

By contrast, LLCs are treated the same as sole proprietorships or partnerships, and all members pay taxes on their share of the profits. Your LLC may choose to be taxed as an S corporation, which has some advantages that may save money, but there are many rules to follow and its best to consult with a tax attorney or CPA.

If you need more information or help with a business LLC or Inc., you can post your legal need on UpCounsel's marketplace. Only the top 5 percent of lawyers are accepted to the UpCounsel website. Lawyers on UpCounsel come from law schools such as Harvard Law and. Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.