INC or LLC: Everything You Need to Know
Inc or LLC is a question that many aspiring business owners find themselves asking when they are choosing a business structure.3 min read
2. What is an Incorporation?
3. Similarities Between a Corporation and an LLC
4. Differences Between a Corporation and an LLC
5. Profit-Sharing and Management
Inc or LLC is a question that many aspiring business owners find themselves asking when they are choosing a business structure. Also known as incorporation or corporation, an inc. refers to a distinct legal entity that separates itself from its owners, meaning that it is responsible for its own actions and obligations. A limited liability company, or LLC, is a hybrid legal entity that provides the advantages of both a corporation and a partnership. These entities are two of the most widely adopted legal structures in the business world, and they both have their benefits and limitations.
What is an LLC?
In general, LLC is the best legal structure for property owners and small businesses. It overtook incorporation as the most preferred business structure in the mid-2000s, partly because of the great versatility and protection it offers business owners. In fact, nearly 75 percent of companies that are established today are LLCs.
An LLC provides personal liability protection for its owners. In the event that the company faces judgment, this structure ensures that its owners' personal assets will be safe. In an LLC, the owners are known as members. Either its members or third-party managers are responsible for its day-to-day operations. It is possible for one LLC to be the parent company of several LLCs. This is a great way to segregate internal assets and prevent additional filings with the state.
What is an Incorporation?
When a sole proprietorship or partnership becomes an incorporation, it exists as its own entity, without legal attachment to its founders or owners. An incorporated company is easy to identify, because it has the abbreviation “inc.” or “corp.”
When it comes to taxation, a corporation can assume the identity of a C corporation or an S corporation. A C corporation pays taxes as a separate entity, while an S corporation practices “pass-through” taxation. Both a C corporation and an S corporation can be double taxed if their profits are distributed as dividends to their owners or shareholders. In a C corporation, taxes on profits are paid at the corporate level and taxes on dividends are reported on the personal tax returns of the shareholders.
Similarities Between a Corporation and an LLC
Both corporation and LLC are established through the filing of paperwork with the state. Additionally, they both protect their owners from personal liability if the company is sued or experiences financial difficulties.
Differences Between a Corporation and an LLC
Profit-Sharing and Management
The management structure of a corporation is fixed and formal. In every corporation, there are shareholders who own the company, directors who make decisions and oversee the company, and officers who are in charge of day-to-day operations. Profits are distributed to shareholders based on the type and amount of shares they own.
An LLC is a newer business structure, and it is specially designed to enable greater flexibility in the management of a company. It does not have to conform to a particular management structure. It can leave its management tasks in the hands of its members or managers. While every member of an LLC has a certain percentage ownership interest, they can decide to distribute profits any way they choose.
As mentioned earlier, a corporation undergoes double taxation: once at the entity level and another at the individual shareholder level. In order to escape double taxation, an incorporation that has no more than 100 shareholders and fulfills other requirements can opt for the S corporation tax status. An S corporation allows taxes on its profits to pass through to its shareholders, who will pay them at the individual level.
An LLC typically uses the same “pass-through” tax structure as an S corporation, but it can also choose to be taxed as a sole-proprietor, partnership, or corporation. However, its members may be subject to self-unemployment taxes.
A corporation is required to meet significantly more recordkeeping requirements than an LLC. The requirements may vary from one state to another, but they generally include:
- Setting up a shareholders' meeting every year
- Keeping excellent meeting minutes and records of major decisions
- Maintaining a record of its shareholders
- Submitting an annual report
- Paying an annual fee
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