Difference Between LLC and INC: Everything You Need to Know
The difference between an LLC and an INC is a complex question once you dive into the legal designations. 4 min read
Difference Between LLC and INC
The difference between an LLC and an INC is a complex question once you dive into the legal designations. The tax statuses of an LLC and INC are classified differently by the Internal Revenue Service (IRS), but the legal classifications are how the courts, the states, and any contract partners view an LLC or an INC. As a legal entity, a corporation will either be designations as a C-corporation or an S-corporation for tax purposes. An LLC can exercise some choice in its tax identity. For instance, an LLC could have the designation of a sole proprietor or partnership, or can be registered as C-corporation, or even as an S-corporation. All in all, an LLC has much more flexibility in terms of exercising its tax identity to best suit its members’ benefits.
Of course, a downside to designating a corporate identity is the potential for double taxation. If a corporation is taxed once for its profit for a corporate tax, then taxed again to account for the dividends received shareholders (known as an individual tax), then it will suffer from double taxation. A corporation designated as an S-corporation allows for “flow-through” tax, which allows for no corporate tax to be gleaned. There are special requirements that must be met to be considered an S-corporation, which could affect its ability to operate as a business.
An LLC is considered a “pass-through” entity which only requires single taxation, though an LLC can opt to be considered a C or S corporation for tax purposes. For businesses that qualify for consideration as an S corporation, there are nuanced legalities involved in an LLC versus an S-corporation designation. LLCs and S-corporations both have flow-through taxation (meaning they escape the burden of double taxation). Meanwhile, LLCs profits undergo an employment tax, though an S-corporation is not.
Small businesses can bypass the burden of employment taxation by designating themselves an s-corporation. It’s important to note that professional counsel is likely required to make business decisions related to designating your business as an LLC or an S-corporation. Another difference between an LLC and an S-corporation is that a corporation’s owners are called shareholders, while an LLC’s owners are called members. LLC’s have total liberty to distribute stakes of ownership without considering capital contributions. The only prior consideration for an S-corporation is that is has a single class of stocks, while dividends are given out proportionally to shareholders in terms of capital investment. Variations on corporate structures are complex and have many designations.
If a corporation wants to create a distinct stock-class structure, then it’s likely subject to the burden of double taxation. LLCs management structure is far more centralized, since any member can act as a manager, while the alternative must be structured with a Board of Directors which oversee management and any overall operations. Shareholders are thought of as a corporation’s owners, even though they are separate from the decisions related to the business and can only elect the board of directors. Even an individual shareholder can be appointed or even elected as a corporate officer.
Another distinction is that the legal guidelines for corporations are federally uniform, though LLC laws may vary depending on the state. The practice of classifying corporations has been well-established for hundreds of years, much longer than the United States’ conception. Most states have largely similar laws pertaining to LLCs, but variations within those state-to-state laws may influence whether a business is registered as an LLC in one state location, while enjoying a corporation status in another state location.
What Is Incorporation?
Incorporating a business is about transforming a sole proprietorship (or a general partnership for that matter) into a formally recognized company that is legally recognized beyond its individual founder(s). These structures generally resolve to become a limited liability company (called an LLC) or a corporation which can be further delineated to an S-corporation or a C-corporation.
The Benefits of a Liability Company
While LLC companies can shield owners from liability, corporations have a management structure wherein individuals called directors spearhead the big business decisions, while individuals known as officers handle the day-to-day. LLCs don’t have the formal structure and enjoy a bit more flexibility with their management style. Pass-through tax options, as well as any income gains or losses are reported on personal returns and paid by the individual.
There are many differences between S and C corporations. S-corporations are also considered “pass-through” in terms of tax identity, and C-corporations get taxed separately and may bear the burden of double taxation is profits are given to its shareholders through dividends.
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