1. What Is Incorporation?
2. Taxes
3. Management and Profits
4. Liability Protection
5. Recordkeeping Requirements

Inc. and LLC are two options for your business. A limited liability company, or LLC, provides protection from some types of liability to the owner(s). The business is a separate legal entity from its owner(s), and the owner(s) are not liable for some acts and debts of the LLC. "Inc." denotes a C- or S-corporation. Like an LLC, it offers the owner(s) protection from some acts and debts of the corporation. You can start both by filing paperwork with the state.

What Is Incorporation?

When you incorporate your business, you grow from a sole proprietorship or partnership to a formally recognized company, legally separate from the founder(s). The new company typically is either an LLC or a corporation.

A corporation issues stock shares to shareholders, and shares can be bought or sold. If you anticipate having outside investors or public stock options, this is a good choice for your business.

The owners of an LLC are called members, and they own a percentage of the company, referred to as their membership interest. It is more difficult to transfer membership than stocks. The LLC's operating agreement usually specifies if and how membership can be transferred. In some states, if a member leaves an LLC and the operating agreement does not contain protocol for this, the LLC must be dissolved.

Taxes

Corporations can be taxed one of two ways:

  • As a C-corporation. All corporations can be taxed as a C-corporation, which means they pay corporate tax on their profits. If shareholders in a C-corporation receive dividends, they must pay personal income tax on them.
  • As an S-corporation. An S-corporation does not pay corporate income tax. Profits go directly to the shareholders, who pay personal income tax on the profits. This often saves money, but who can become an S-corporation is strictly regulated. For example, a corporation with more than 100 shareholders, foreign shareholders, or more than one type of stock cannot be an S-corporations.

LLCs do not have their own tax designation and are typically taxed as either a sole proprietorship or partnership. Income and expenses are filed on each member's personal income tax. However, they can choose to be taxed as a C- or S-corporation. LLCs offer pass-through taxation without the rules and regulations of an S-corporation; however, a business owner working in the business might save on the self-employment tax if he/she sets up an S-corporation as opposed to an LLC.

Business taxes are complex, so you should talk with a tax professional for advice.

Management and Profits

Corporations have a predictable standard management structure: a guiding Board of Directors, officers who run the company, and shareholders. Shareholders meet yearly and receive company profits according to the number of shares they own. Adding shareholders is easy, and transferring shares is simple.

LLCs are not required to use a certain management system and can be managed by their members or by managers. Profits are distributed among members by mutual agreement. LLC membership is not as easily transferable as stock.

Liability Protection

Both corporations and LLCs offer limited liability protection. The owners of both are protected against business debts and lawsuits. In other words, if your business is sued or creditors demand payment, your personal assets, such as your house or car, are safe. You may, however, lose your investment in the business. You receive the same liability protection whether you are a corporation or LLC.

Typically, corporate shareholders, officers, and Board of Directors are not liable for the corporation's debts or obligations. As in an LLC, they may lose their investment if creditors collect or the business is sued.

Recordkeeping Requirements

A corporation must have a Board of Directors, even if it has only one or two owners. It must also have an annual shareholders meeting, and most states require minutes of the meeting and records of vital resolutions. The corporation must keep shareholder records and, in many states, must file an annual report and pay a yearly fee.

In comparison, LLCs have minimal paperwork. While they should keep good records, they are not required to file an annual report.

Both corporations and LLCs are bound by the laws of the state they are formed in. Each state has its own rules, but typically corporations are more regulated.

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