LLC and Inc: Everything You Need to Know
LLC and Inc. are two different business structures you could choose for your company. Limited liability companies (LLC) and corporations (Inc.) 3 min read
2. What is Incorporation?
3. Business Ownership Options
4. Management and Profit-Sharing
LLC and Inc. are two different business structures you could choose for your company. Limited liability companies (LLC) and corporations (Inc.) both offer advanced personal liability protections to their owners. However, forming and operating these entities are very different, which is why many business owners have trouble choosing between the two.
Business Entity Overview
When choosing between an LLC or Inc., it's common for new business owners to be confused about which option best fits their company. For instance, both business structures protect owners from personal liability when the company is sued and require registering with the state where the entity will be operated. The biggest differences between these entities are their tax liabilities and management structures.
When trying to decide between these two structures, you should consider your business goals for the short- and long-term. However, whether you form an LLC or a corporation, you will be legitimizing your business and giving yourself an advantage over your competitors.
If you're having trouble picking your entity type, you may want to consult with an attorney that understands all the laws regulating corporations and limited liability companies.
What is Incorporation?
When incorporating a business, you are making your business an entity that is legally separate from its owners. Incorporation can result in two business structures: LLCs and corporations.
A corporation is the best choice for larger businesses and has much more rigid management and ownership structure than other business types. However, it also provides with increased credibility and liability protections should your business ever be involved in a lawsuit.
Business Ownership Options
In a corporation, the owners of the business are known as shareholders. This is because owners are given stock in the company, which are also called shares. If you are seeking outside investors for your business, forming a corporation is a good choice, as shares of a corporation can be transferred very easily. Forming a corporation will also allow you eventually offer company stocks publicly.
Limited liability company owners are called members, and they are provided a percentage of ownership in the company instead of shares. This ownership percentage can also be referred to as a membership interest. The percentage of the company that a member owns will usually determine the number of profits they will be given. It's possible for LLC members to be given an equal portion of profits, regardless of their initial investment, but it's much more difficult to transfer LLC membership than it is corporate shares.
Generally, the operating agreement of the LLC will establish a solution for transferring LLC membership, as well as:
- Profit and loss distribution
- Roles of members
- Management of the LLC
In certain locations, an LLC can be dissolved if a member leaves the company and the operating agreement does not describe how their membership will be transferred. Corporations, on the other hand, can prevent dissolution by creating a unique stock structure, but only C-Corporations have this ability, not S-Corporations.
Management and Profit-Sharing
The management structure of a corporation can be very strict. All corporations are required to have a board of directors, who handle big-picture business decisions. Day-to-day management is generally covered by corporate officers. Unlike an LLC's members, shareholders own a stake in the company, but usually have little say in how it is operated. However, shareholders vote in board member elections and will usually also be consulted on major decisions. Individual shareholders of a company may serve on the board of directors or be named as a corporate officer. Corporations must hold an annual shareholders meeting where profits will be distributed.
In smaller corporations, it's common for one person to fill several roles. For example, an individual in a small corporation could be:
- A director
- An officer
- A shareholder
This flexibility is less common in larger companies. In the bylaws of a corporation, the responsibilities of the shareholders, directors, and officers will be outlined. New shareholders can be added fairly easily whenever the corporation requires.
LLCs are a recently created business entity, and they are designed to provide a more flexible management structure than corporations. An LLC can either be managed by its members or by professional managers hired by the company. When an LLC is member-managed, the owners of the company are very involved in the daily operations of the business. If an LLC is manager-managed, however, members will usually only be involved in important company decisions.
If you need help understanding the differences between an LLC and Inc., you can post your legal needs 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.