LC vs LLC: Everything You Need to Know
The difference between LC vs. LLC has to do with terminology. In essence, these two business entity types are the same, although they have different names.3 min read
The biggest difference between LC vs. LLC has to do with terminology. In essence, these two business entity types are the same, although they have different names.
Background of LC vs. LLC
If you're like many people, you might be confused about what LC and LLC stand for and how you can choose the right entity type for your business. The incorporation process can be very complicated, and before you begin on this journey, you need to determine which entity best fits your need. If you're unfamiliar with the different options for incorporation, choosing an entity type can slow down the process of starting your business.
When you form a business, the formation will occur at the state level, and the laws in the state can influence the process of establishing your business. State law can determine which business structures you can choose and will also influence how you are required to name your company. The abbreviations LC and LLC are used to describe business types.
Whether the abbreviation LC or LLC is used depends on the state in which you are forming your business. However, these terms refer to the same type of business entity. The abbreviation LLC is shorthand for limited liability company, and LC stands for limited company. Both abbreviations refer to a business where the owners are not liable for the debts and obligations of the company.
Incorporating as a limited company will restrict the liability of the shareholders of the company. For small businesses, incorporating as a limited liability company is usually the best choice. LLCs are one of the newest entity types, having only been available since the 1970s.
Because of their liability protections and flexible management, LLCs have become the most popular type of business entity, overtaking corporations. Members own LLCs, and these members can either manage the company themselves or hire a third-party manager. The governing document of limited liability companies is called the Operating Agreement, and this document outlines the members' responsibilities and how they will run the company.
When an LC or LLC is sued, the assets of the owners are protected. The exception to this rule is if one of the owners has personally guaranteed a business loan or has put up their property as collateral. With LCs and LLCs, company members and investors are shielded from risk. That being said, there are some drawbacks to LLCs that do not apply to corporations.
LLCs, unlike corporations, are funded privately, meaning they cannot raise capital by selling stock in the company publicly. Also, because each state has different rules for LCs and LLCs, forming a regional business as an LC or LLC can be very difficult.
Pros of LCs and LLCs
There are several different types of hybrid business entities that can provide tax benefits and liability protections:
- Limited liability companies
- Limited liability partnerships
- Professional corporations
When a small business wishes to shield its owners from personal liability without incorporating, the best idea is forming a limited liability partnership (LLP) or limited liability company. In almost every aspect, LLCs and LLPs are identical. The biggest difference between the two is that an LLC can have a single member, whereas an LLP needs at least two partners.
An advantage of forming an LLC is the ability to choose pass-through taxation, meaning the company itself is not taxed on profits. Instead, owners will report profits on their personal tax returns. Virtually every state allows for the formation of an LLC in some form, and when you choose this business structure, you will have access to an S corporation's tax benefits and a partnership's flexible management.
In addition, LLCs can be managed by their members, and shareholders are allowed to be nonresident aliens. There are several other benefits that you can receive by structuring your business as a limited liability company:
- Legally separating your company from its owners.
- Allowing your company to keep after-tax profits and own assets.
- Entering into contracts.
LC and LLC Drawbacks
LCs and LLCs also have certain disadvantages that you should consider. For instance, some company members must observe business formalities. LLCs, however, do not need to observe as many formalities as C corporations. Because LCs and LLCs are not publicly traded companies, there is some limit to how large they can grow.
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