Incorporated vs LLC: Everything You Need to Know
Incorporated vs LLC is a comparison that many aspiring business owners find themselves making when they are trying to determine the most suitable structure for a business.3 min read
Incorporated vs LLC is a comparison that many aspiring business owners find themselves making when they are trying to determine the most suitable structure for a business. An incorporated business, or corporation, is a legal entity that exists separately from its owners, meaning that it is responsible for its own taxes and financial obligations. An LLC, or limited liability company, is a hybrid entity that passes taxes on profits through to its owners and shields them from personal liability. Both a corporation and an LLC have their advantages and disadvantages.
What is a Corporation?
According to the law, a corporation is an entity unto itself. Similar to a person, it has many rights and responsibilities. It is able to own land and property, conduct transactions, and sue and be sued. A for-profit corporation can have as many owners as it wishes. A non-profit corporation, on the other hand, has only directors, but no owners. A corporation can only be established after obtaining approval from the state government. It must submit articles of incorporation and certain public records and documents to the state government.
What is an LLC?
An LLC is a hybrid business entity. It is formed with the “articles of organization”, a document that which will be publicly specified by the state. Additionally, its owners may privately specify an “operating agreement. With approval from the members of the LLC, this agreement is a contract that governs the company's membership, operation, management, and income distribution.
An LLC can have any number of owners, who are referred to as members. It gives its members the liability protection of a corporation, while possessing characteristics of a partnership. While it must operate under the endorsement of the state government, it has the freedom to structure itself as it wishes and does not have to report information about its ownership or management. An LLC also allows pass-through taxation, meaning that taxes will be reported on the personal tax returns of its owners, not at the business level.
Advantages and Disadvantages of a Corporation
- A corporation can sell shares of stock to get funding from investors.
- Income splitting in a corporation may reduce tax liability.
- A C corporation's tax structure requires its profits to be taxed twice, but an S corporation's does not.
- A C corporation is required to hold annual meetings and document minutes.
Advantages and Disadvantages of an LLC
- An LLC can have any number of owners.
- An LLC passes profits and losses through to its owner's personal tax returns.
- An LLC does not have to hold annual meetings or record minutes.
- An LLC cannot split corporate income to reduce tax liability.
- An LLC is unable to issue stock.
Incorporated vs LLC: Similarities and Differences
Profit-Sharing and Management
Every corporation has a group of shareholders who own shares in the company, a board of directors overseeing the entire company, and a number of officers who keep the business running. An LLC does not have a specific management structure. Its management team may consist of its owners or a group of managers. It can also be run somewhat informally. Every member has a certain percentage of ownership interest in the company, but they can distribute profits any way they agree to. Also, LLC ownership is more difficult to transfer than corporate stock.
A C corporation pays taxes on its profits at the corporate level. In addition, its shareholders have to pay taxes on their dividends, resulting in double taxation. An S corporation does not report taxes at the corporate level. Instead, it allows its profits to flow through to its shareholder's individual tax returns. An LLC has the same tax structure as an S corporation, with its taxes reported at the individual level.
Both a corporation and an LLC protect their owners from personal liability for business-related debts, lawsuits, and other financial obligations. If a corporation or LLC faces debt collection action from a creditor, the personal assets of its shareholders or owners will be safe. However, the money invested in the business will be lost.
According to state requirements, a corporation must hold a shareholders' meeting every year and record minutes of its meetings and important resolutions. It must also maintain shareholders' records. Some states require each corporation to pay an annual fee and submit an annual report. Record-keeping requirements for an LLC are significantly more relaxed.
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