1. Abbreviations
2. Percentage and Shareholders
3. Governance Structure
4. Corporate Taxation
5. Tax Structure

An inc LLC corp are different entities, and choosing one depends on your short and long-term business goals. When it comes to incorporation, you should choose a favorable state such as Delaware, which is considered the gold standard of LLC registration due to the state’s lucrative business laws. Less favorable states include:

  • California
  • Pennsylvania
  • New York

Further, Delaware has the best legal system when it comes resolving ownership disputes and any other legal issues that may arise. If you choose to incorporate, your business moves from a sole proprietorship or general partnership into a legal entity that’s recognized by the state where the business is incorporated.

Regardless, a company falls into two categories:

Abbreviations

When you choose to incorporate, you have different variations to choose from, but you should know that such registration comes with a number of personal liability protections, and incorporation gives your business credibility in the eyes of your customers.

When it comes to entity names, you’ll notice that all names with abbreviations in the form of “LLC” or “Inc.” LLC means Limited Liability Company, and Inc. stands for a corporate entity. It’s worth noting that the best entity for small businesses would be LLCs due to the flexibility and fewer regulations afforded to owners.

Percentage and Shareholders

On the other hand, a corporation with a certain number of guidelines all owners must follow. For example, shareholders must meet on an annual basis. With that, corporations divide all profits based on the number of shares each individual owns. Further, shares among members are easily transferable between owners, which is a good option for businesses that intend to make stock offerings or attract investors. Overall, corporations have a more standard and rigid form of management system than LLCs.

Governance Structure

On the other hand, an LLC does not have a particular management system, and the type of governance depends on owner discretion. Regardless of the management structure, all rules and operating procedures should be included in your operating agreement. An LLC can be run by owners or a team of appointed managers.

Each LLC member owns a certain percentage called a membership interest. Job titles are generally not required, and smaller member-managed LLCs tend to be governed in an informal manner. Even though an LLC member may own a certain percentage in the LLC, profits can be divided in any manner as pleased, so long as all members agree to the terms and conditions outlined in the operating agreement. LLCs come with few restrictions, but some states mandate that an LLC must be dissolved if a member leaves without operating agreement guidelines.

  • Note: LLCs and corporations have no restrictions on the number of owners or shareholders in the business, and there are no restrictions on who would qualify as an owner.

However, S corps come with certain parameters. For instance, authorities cap S corp membership at 100 members or fewer, and the owners cannot be non-resident aliens. Further, S corps cannot be owned by other entities in the form of another LLC or corporation.

Corporate Taxation

Corporations may be taxed in two different manners, but the default method falls under C classification. Corporations pay federal income on the business itself, and the shareholders pay an additional tax on any dividends received. This is also referred to as double taxation, where the business and the individuals are taxed. A C classification would not make sense for smaller businesses and LLCs, but it is a good choice if a business intends to attract outside investors, and many investors prefer a C corp before investing.

S corps do not pay corporate income taxes, but any profits pass from the business to the tax returns of shareholders. Further, each shareholder would pay his or her dues on the tax returns. Pass-through taxation does not permit a tax on the business.

Tax Structure

LLCs have a more flexible tax structure than corporations, being taxed as a sole partnership (in the case of a single-member LLC) or partnership (in the case of a multi-member LLC. All income and losses would be reported on personal tax returns. For owners working within the business, they can reduce the cost of self-employment taxes by choosing an S corp as opposed to an LLC.

S corps save owners money on Social Security, Medicare, and self-employment taxes. Further, owners can offset any non-business income with business losses. This would not be possible with a C corp. An LLC can choose a C or S tax classification. Consult an attorney or accountant if you are unsure which tax classification would suit your business the most.

To find out more about an inc LLC corp, submit your legal inquiry to our UpCounsel marketplace. UpCousnel lawyers are some of the best in the nation and will help you establish a sound tax structure within your business. In addition, our lawyers will guide you through the LLC or corporate filing process if you are a start-up or entrepreneur.