Difference Between Inc and LLC
These two business types differ in the ways they're owned, managed, and taxed, and they have different requirements for reports and records.5 min read
What Is the Difference Between Inc and LLC?
There's more than one difference between Inc and LLC. These two business types differ in the ways they're owned, managed, and taxed, and they have different requirements for reports and records. A limited liability company (L.L.C. or LLC) is a company structure that offers personal liability protection to its owners. This implies that the enterprise is a separate legal entity and the owners (members) usually are not legally responsible for the acts and money owed of the LLC.
An incorporated company also provides liability protection, but differs from an LLC in the following ways:
- Laws and regulations
- Management overhead
- Taxes on profits
Inc vs LLC: Things to consider
New business owners typically get conflicting recommendations about whether to establish a limited liability company (LLC) or an incorporation (Inc.). Both the LLC and Inc. are created by submitting paperwork with the state, and each helps to guard business owners from legal responsibility if the enterprise is sued or runs into monetary trouble. There are, nevertheless, differences in the way in which LLCs and corporations are managed and taxed.
The choice of forming either an LLC or an incorporation depends on the kind of business the person is creating, as well as possible tax consequences of forming the corporate entity, among other issues. The creation and administration of an LLC is much simpler and more versatile than that of a corporation. LLCs offer a comparatively new kind of enterprise entity ruled by state statute. Nonetheless, there are benefits and drawbacks to each kind of enterprise structure.
What is Incorporation?
When you incorporate an enterprise, you evolve from a sole proprietorship (or basic partnership) into an organization that’s formally acknowledged by its state of incorporation. The corporation turns into a legal enterprise separate from the people who founded it.
For an Inc., the Articles of Incorporation (additionally known as a Constitution, Certificates of Incorporation, or Letters Patent) are filed listing the purpose of the business, principal location, and the quantity and type of shares of stock. A registration charge is due, which can normally be between $25 and $1,000, depending on the state. A company name is mostly made up of three components:
- Distinctive feature
- Descriptive feature
- Legal ending
All companies should have a distinctive element, and in some locations a legal ending to their names. Some companies select to not have a descriptive feature. For instance: Within the identity "ABC Exports Inc.," the phrase "ABC" is the distinctive feature, the word "Exports" is the descriptive feature, and "Inc." is the legal ending. The legal ending signifies that it's actually a legal company and not just a business registration or partnership.
The structure of an Inc. is as follows:
- Shareholders own the stock of the company
- Shareholders elect directors (generally known as the Board of Directors)
- Directors appoint officers (president, secretary, treasurer, and so on)
- Officers run the business (day-to-day operations)
What Is a Limited Liability Company (LLC)?
The LLC business structure started in 1977 with the first state allowing LLC formation being Wyoming. LLCs, like corporations, have limited liability protection, but they have more flexibility to operate as a partnership or sole proprietor.
The limited liability (the "LL" in LLC) is what protects personal assets against any liabilities of a business.
Legal Entity vs. Tax Entity
- It can be confusing for new entrepreneurs to recognize if they're talking about an Inc. or an LLC.
- A tax entity classification is how the IRS sees your business (sole proprietor/partnership vs. corporation), and a legal entity classification (LLC vs. Inc.) is how stakeholders besides the IRS views your business.
- When you form a corporation, you are given a tax entity, meaning you're a C corp or S corp. If your legal entity is an LLC, you can choose your tax identity, which could be a sole proprietor/partnership, C corp, or S corp.
- Ultimately, LLCs have greater flexibility to choose the tax entity with the most benefit for its members.
- The differences in taxes between S corps and C corps is the biggest influence when evaluating corporation types.
- An S corp is like an LLC and acts as a pass-through tax entity.
- C corps are taxed as separate entities paying tax twice. They pay tax on their profits; then when the individual owners receive the income as dividends, they're taxed again.
- LLCs protect their owners (known as members) from any personal liability regardless of the actions of the LLC. So, if a lawsuit involving your business happens, you are not at risk personally.
- LLCs have a flexible management structure, whereas corporations have a set management structure with directors making big business decisions and officers running the business day-to-day.
- Pass-through taxation means there are no taxes on profits at a corporate level. If you're an LLC, all business profits/losses are filed on your personal tax return.
LLC vs. Corporation: Other Key Differences
- Business Losses: Regarding business losses, the term "S corporation advantage" has been coined. This is in regards to business losses, which business owners can use as deductions on their personal tax return.
- Self-Employment Taxes: For self-employment and Social Security/Medicare taxes, an S-corp can help save money because of the single tax applied.
- Dividends and Venture Capitalists: C corps are popular for developing businesses, as they can hold different classes of stock. Venture capitalists prefer C Corps when funding a business as they love (usually higher) dividends when the C-corp is profitable.
- Earnings: Within reason, C corps can accumulate earnings year to year.
- LLCs and C corporations have no restrictions on who can own the business or how many owners there are, but S corps are limited to 100 owners who must be US residents/citizens.
- In addition, S corps cannot be owned by C corps, LLCs, fellow S corps, or non-qualified trusts.
- A business expecting to bring on outside investors or to go public will want to be a corporate entity, as shares can be easily transferred between owners and different classes of stock help with B and C investment rounds.
- The designated percentage of a company an LLC owner owns is called a "membership interest." LLC memberships can be more difficult to transfer than a corporation membership, depending on the operating agreement, which will say if it's possible and how.
- An LLC can issue ownership stake however it likes, as the individual capital contributions of a member play no role. An LLC cannot submit a public offer for potential ownership investment initially, making it hard for an LLC to expand, meet obligations, and finance day-to-day operations.
- Corporations will always exist regardless if owners come and go from the company. In some states, an LLC could potentially dissolve if a member leaves and the operating agreement doesn't specify what happens in this scenario.
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