Inc vs LLC: Everything You Need to Know
Inc vs LLC is a comparison that some entrepreneurs have to make when they are choosing a legal entity for their businesses.3 min read
Inc vs LLC is a comparison that some entrepreneurs have to make when they are choosing a legal entity for their businesses. Also called a corporation, an incorporation (inc.) is a business entity that separates itself from its owners and consequently grants them protection from personal liability for its debts and other financial obligations. However, its owners, or shareholders, are subject to double taxation. A limited liability company (LLC), on the other hand, is a hybrid business entity that also provides personal liability protection, but its pass-through tax structure enables its owners to avoid double taxation.
What Is an LLC?
An LLC refers to a business structure that gives its owners limited liability protection. This means that the company is a distinct legal entity, making its owners not personally liable for some of its debts or actions. An LLC passes taxes on its profits or losses through to its owners, but it can also choose to pay taxes as a corporation.
What Is an Incorporation?
Similar to an LLC, a corporation provides liability protection for its owners. However, it is different from an LLC in that it has different ownership and management structures, complies with different rules and regulations, and pays taxes differently.
There are two types of corporation: C corporation and S corporation. Each of these corporation types has its own advantages and disadvantages. Many business owners regard taxation as the most significant difference between a C and S corporations. An S corporation is similar to an LLC in that it pays taxes as a “pass-through” entity.
In contrast, a C corporation is taxed as a separate entity. It is subject to double taxation if its profits are distributed to its shareholders as dividends. It pays taxes on its profits at the corporate level, and its owners pay taxes on dividends at the individual level.
Similarities and Differences Between Inc. and LLC
Both corporations and LLCs protect their owners from being held personally liable for business lawsuits and debts. If a company faces a lawsuit or collection action from creditors, the personal assets of its owners — such as houses, cars, and personal bank accounts — will be safe. However, the owners may lose the money they invested in the business.
Profit-Sharing and Management
A corporation has a standard management structure. Every corporation is required to have shareholders who own company stock, directors who oversee the “big picture,” and officers who are in charge of day-to-day operations. The shareholders of a corporation meet annually and receive dividends based on the type and number of shares they own. In a corporation, adding new shareholders and transferring shares are relatively easy.
An LLC is not required to have any particular management structure. It can be managed by its members or managers. Every member has a certain ownership percentage, but each person can decide how to have profits distributed. However, LLC membership is more difficult to transfer than corporate stock. Corporations and LLCs can choose to have any number of members they wish.
A corporation can either be taxed as a C corporation or an S corporation. A C corporation pays taxes on its profits at the corporate level. If shareholders receive profit distributions, they have to pay taxes on them at the individual level. This double taxation is often regarded as a disadvantage of a C corporation. An S corporation, on the other hand, does not pay income taxes at the corporate level. Instead, it passes its profits through to the personal tax returns of its shareholders.
An LLC does not have its own tax classification. Typically, a single-member LLC pays taxes in the same way as a sole proprietorship, and a multi-member LLC is taxed as a partnership. The income and expenses of an LLC are reported on the personal tax returns of its members, and each member is taxed according to his or her share of the company's profits. Nonetheless, an LLC can choose to pay taxes as a C corporation or an S corporation.
A corporation must meet the following recordkeeping requirements:
- Hold a shareholders' meeting annually
- Maintain shareholder records
- Keep minutes of its meetings and records of major decisions in most states
- Pay an annual fee and file an annual report in many states
An LLC should maintain good records, but it is required to meet minimal recordkeeping requirements in most states.
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