Difference Between Inc and LLC: Everything You Need to Know
These two business types differ in the ways they're owned, managed, and taxed, and they have different requirements for reports and records.4 min read
What is Incorporation?
When you incorporate your business, you are signaling you want to be formally recognized as a company by the state of incorporation. So, unlike a sole proprietor or partnership, your business establishes its own identity detached from the founders.
There are usually two categories your new company structure adopts:
A corporation is also where the shorthand, Inc., comes from.
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.
Difference Between LLC and Inc.
Note: LLC is short for limited liability company, and Inc. is short for incorporated company.
Both business types protect their owners, but they're different in the way they're:
They also differ in their requirements for reports and records
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.
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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