INC Versus LLC: Everything You Need to Know
Inc versus LLC business structures include important differences, mostly pertaining to the complexity and flexibility a company has, as well as key tax implications.3 min read
LLC vs. Corporation
LLC is the abbreviation for “limited liability company,” while “Inc.” and “Corp.” are both abbreviations for a corporation. Both business types are formed by filing the necessary paperwork with the state, and both offer their owners protection for personal assets if the business has debts and legal obligations.
These business structures differ in how they're owned, taxed, and managed. They also have different requirements related to recordkeeping and reporting. When you're choosing which business type to form, the best option for you is whichever gives you a good start and also sets a strong foundation for future growth and success.
Think about your short- and long-term goals for your business when deciding between an LLC or corporation.
Shareholders own corporations by owning shares of stock in the company. It's easy to transfer shares from one owner to another. Forming a corporation is a good idea if your business will have outside investors or eventually make a public stock offering.
LLC owners are known as “members.” They don't own shares in the company. Instead, each member holds a “membership interest” or percentage of ownership. It's generally more difficult to transfer membership interest than shares.
An operating agreement usually specifies how members can transfer membership interests in the LLC. Some states will require an LLC to be dissolved if the company's operating agreement doesn't specify how to distribute membership interests if a member leaves.
There's no limit to the number of owners a corporation or LLC can have.
Management and Profit-Sharing Differences
Corporations have rigid, predictable management structures and follow set standard procedures that help them maintain formality and professionalism. LLCs have requirements to follow as well, but they may not be as strictly enforced.
All corporations have the following:
- Board of directors
- Officers responsible for day-to-day operations
In small corporations, single individuals may play multiple roles, including acting as an officer, director, and shareholder. In a large corporation, shareholders aren't likely to be involved in the business's daily operations.
A corporation's bylaws spell out the rights and responsibilities of the company's shareholders, officers, and directors. Shareholders meet yearly, and company profits are distributed to shareholders based on the number and type of shares they own.
LLCs are a relatively new type of business structure, and they offer a more flexible management style.
They can be member-managed (managed by owners) or manager-managed. In a member-managed LLC, owners typically take a very active role in running the business. In a manager-managed LLC, investors may be involved in the financial side but don't play an active part in daily operations.
A small member-managed LLC may not issue specific job titles, and the operations may be rather informal. Profits are distributed in whatever way LLC members agree upon.
Investors often prefer corporations as a business structure over LLCs because corporations offer the advantage of easy share transferability and a uniform management system. However, if you're not planning to raise outside capital for your small business, an LLC may be fine since it's more flexible and informal.
Differences in Recordkeeping
Rules about recordkeeping and reporting may vary from state to state. Typically, LLCs have fewer regulations and requirements than corporations.
Corporations, even those with only one or two owners, must hold yearly shareholders' meetings and keep minutes of their meetings. They must also maintain certain records, including shareholder records. Many states require corporations to file annual reports and pay annual fees.
LLCs should keep accurate records, but these business types typically have minimal requirements. They may not have to file an annual report (depending on the state), and they're not required to hold yearly meetings for their members. These are appealing considerations for small business owners who want a simpler structure with fewer hassles.
Choosing the right business structure for you depends a great deal on the type of company you wish to operate. Consider your future goals as well. A simple LLC might be ideal if you want to keep things small and flexible. If attracting investors is your eventual aim, however, you may want to opt for a corporation.
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