LLC vs Corp vs INC: Everything You Need to Know
Comparing LLC vs. Corp vs. Inc.? Incorporation makes your company a legal business entity in its own right, separate from yourself and any others who founded it.4 min read
2. Legal Entities Versus Tax Entities
3. Liability Protection
4. Profit-Sharing and Management
Comparing LLC vs. Corp vs. Inc.? Incorporation makes your company a legal business entity in its own right, separate from yourself and any others who founded it. When you choose to incorporate your sole proprietorship or partnership, you're choosing a company structure formally recognized by the state as an incorporated entity. But which one is right for your company?
LLC Versus Corp Versus Inc.: Which One is Best?
A new incorporation structure typically falls into one of two categories:
- Limited liability company.
The term “incorporated” or “Inc.” simply refers to the fact that a company is incorporated.
Both an LLC and corporation are established by filing paperwork with your Secretary of State. Both are also designed to protect owners from personal liability if the business faces debts or a lawsuit. However, there are differences in how LLCs and corporations are taxed and managed. These differences are often the deciding factors in whether a business owner chooses an LLC or corporation structure.
In general, you should always seek professional advice from a business lawyer and your accountant to help you decide which option best serves your company's needs.
Legal Entities Versus Tax Entities
When choosing between an LLC and a corporation, it's important to consider the legal and tax entity distinctions. New business owners often confuse these types of entities and end up confused.
A legal entity is a classification used by the:
- Contractual partners.
A tax entity is how the IRS classifies the business. For example, a corporation is a legal entity. However, it is given a tax classification as either a C corp or an S corp.
An LLC can also choose its tax identity. An LLC can either be a sole proprietorship or a partnership, depending on its number of owners. However, it can also be classified as an S corp or a C corp for tax purposes. Due to this, LLCs have more flexibility when it comes to tax structure.
Regardless of whether you own an LLC or a corporation, you have personal liability protection from business-related debts and lawsuits. In other words, if the company faces debt collections or a lawsuit, your personal assets are protected, including your:
- Bank accounts.
The only money you stand to lose in these circumstances is the money you invested in the company.
Profit-Sharing and Management
Corporations must abide by a regulated management structure with a board of directors, officers, and shareholders. Shareholders are considered the company owners. However, they must remain separate from all business decisions except for the ability to elect directors. Shareholders must meet annually, and they receive profits based on the number of shares they own.
With an LLC, there is no required management structure. LLCs are managed by members or hired managers, and small-managed LLCs can operate informally. Each LLC member owns a certain interest percentage in the business. However, profits are distributed according to a member agreement.
One of the biggest downsides to an LLC, however, is that membership isn't as easily transferred as with corporate stock. Since corporations have a uniform management structure, shares are easily transferable, making them the preferred entity of investors.
If your corporation is taxed as a C corp, your company pays taxes on its profits. Shareholders who receive dividends also pay personal income tax on those dividends, resulting in a double taxation. Double taxation is often considered the biggest disadvantage of choosing a C corp entity.
If you choose S corp status, your company doesn't have to pay corporate income tax. Instead, profits pass through to the shareholders who then pay income taxes on the profits. Pass-through taxation is considered a major benefit for both S corps and LLCs.
On the other hand, LLCs do not have a separate tax classification. Single-member LLCs pay taxes as sole proprietorships while multi-member LLCs pay taxes as partnerships unless they choose to be taxed otherwise. Each member's expenses and income are reported on his or her own income taxes, and each one must pay taxes on their share of the profits.
In general, an LLC requires less paperwork to get started than a corporation. LLCs are the result of state law, so the requirements for forming your LLC depends on the state where you live. All that is typically required for starting an LLC is filing an Articles of Organization with the state and paying the filing fee, which can range from $100 to $800.
By contrast, corporations must:
- Have an annual shareholders' meeting.
- Keep meticulous records.
- Keep all meeting minutes.
- Maintain shareholder records.
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