INC vs LLC vs LTD: Everything You Need to Know
INC vs LLC vs LTD lays out important differences between corporations and limited liability companies or limited companies. 3 min read
2. Characteristics of LLCs
3. Characteristics of Corporations
What Is Incorporation?
Incorporation is the act of changing from a general partnership or sole proprietorship to a formally recognized incorporated company. The business is now a legal entity of its own, separate from its owners.
Deciding to form a corporation or an LLC depends a great deal on the type of business you want to operate. You'll also consider potential tax consequences when choosing a business structure. Incorporating usually provides certain benefits, such as increased credibility and protection from personal liability.
There are pros and cons to each type of incorporation.
LLC and Inc. are abbreviations for different business types. LLC is short for “limited liability company.” Inc. (as well as corp.) stands for corporation.
You'll form both business types by filing forms with the state. Differences in these business structures include the following:
- Ownership terms
- Management terms
- Tax structures
- Recordkeeping requirements
- Reporting requirements
Characteristics of LLCs
LLCs are a relatively new type of business structure that offer more flexibility in how they're managed. State requirements vary in how LLCs are formed. You'll usually form an LLC by filing an Articles of Organization with the state. The cost may range from $100 to $800.
You must choose a name for your LLC that's unique from existing business names. You can file forms to start an LLC online in some states, making it easy to start your business. Only a few states require you to file a public notice when you form an LLC.
When your Articles of Organization is processed and any other applicable requirements are met, your LLC is officially created.
An LLC's operating agreement is often used to outline all member roles in the business. An operating agreement can also detail the following:
- The rights and responsibilities of each LLC member
- Definition of business relationship
- Issues of capital structure
- The allocation of profits and losses
- Terms for member buyouts or member deaths
- Other important considerations related to the business
If your LLC doesn't have an operating agreement, your business will be governed by the default guidelines in your state.
Each LLC owner is known as a member. Members own a specified percentage of the LLC, not shares. A member's percentage of the business may be known as “membership interest.” Member roles are equivalent to corporation shareholders.
Members or managers can manage an LLC. In general, LLC owners are very involved in the day-to-day operations of a member-managed LLC. Manager-managed LLCs typically have investors who don't take an active role in daily operations.
Characteristics of Corporations
Shareholders own stock in corporations, so they're the business owners. Corporations are often taxed by default as C-corporations.
When deciding which business structure to form, most owners consider taxation as the biggest difference between C-corps and S-corps. C-corps pay corporation taxes on their profits. Shareholders who receive dividends are required to pay personal income taxes on the dividends.
If a corporation meets certain requirements and has 100 or fewer shareholders, they may choose an S-corp designation to avoid double taxation. S-corps don't pay corporate income tax. All profits pass through to company shareholders, who then pay personal income taxes on the profits. S-corps are considered “pass-through” tax entities, similar to LLCs. “Pass through" taxation has the potential to save a company money, but not every corporation can enjoy this tax advantage.
Corporations have less flexibility than LLCs in management structure. In a corporation, directors are in charge of major business decisions and officers take charge of day-to-day business operations. Corporations can be member-managed or manager-managed.
In small corporations, one person may play several roles, such as being an officer, director, and shareholder, but in large corporations, shareholders aren't likely to be directly involved in running the company. A corporation's bylaws lay out rights and responsibilities of the company shareholders, officers, and directors.
Tax advantages shouldn't be your only consideration when forming a business. Although most business owners want to maximize profits and minimize tax burdens, there are many other factors that go into making the best decision for you.
If you need help deciding on a business structure, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.