Pros and Cons of LLC vs Inc: Everything You Need to Know
Understanding the pros and cons of LLC vs Inc is very important if you want to start a company.3 min read
Understanding the pros and cons of LLC vs Inc is very important if you want to start a company. When starting a new business, one of the first decisions is choosing which type of entity or business structure to operate under. The business structure should be based on your particular needs: what you sell, your finances, and how many owners you will have. The various types of business structures all have advantages and disadvantages.
What Are the Three Types of Business Structures?
There are three main types, and each type has its own legal and tax implications to follow. The three types are:
- S corporation.
- C corporation.
- Limited liability company.
What Is an S Corporation?
An S Corporation, also commonly referred to as an S corp, is a type of business structure option that allows business owners to take advantage of pass-through taxation under Subchapter S or Chapter 1.
This business structure option requires the owner(s) to first be a sole proprietor or a partnership, or incorporate the business before moving to S status. Owners often choose S corp for the advantage of limited liability protection for the company's directors, officers, shareholders, and employees. S corp status also eliminates double taxation and requires a yearly filing of taxes; this is unlike C corporations, which must file quarterly.
What Is a C Corporation?
The C corporation, also known as a C corp, is the most common type of business structure. It offers enhanced growth potential through unlimited shareholders and the sale of stocks. A C corp has certain tax advantages, such as tax-deductible business expenses. Arguably, the biggest downfall of C corps is double taxation; the C corp is taxed when earning income and then the profits are paid out to shareholders who then report the profit as income on their tax returns.
What Is an LLC?
A limited liability company, commonly known as an LLC, is a mixture of a corporation and a partnership. It is a great business structure for small business owners in that it provides numerous growth opportunities. An LLC's owner(s) are protected from personal liabilities and enjoy tax advantages, such as no double taxation. LLCs are well known for flexibility and require a bank account separate from the owners' personal bank accounts. Ideally, owners want to separate these funds regardless.
An LLC will allow additional members to be added if needed and different classes of ownership are also available. The option to have non-managing members and non-voting members are an option as an LLC builds equity.
On the negative side, if owners choose to raise money or acquire investors, the LLC will most likely be required to convert to a C corp. Also, if the owners take on debt through credit or loans by providing a personal guarantee, then the LLC will not take full responsibility for such debts. This puts the borrowers at risk of being personally liable for the debts if the LLC cannot pay.
Choosing the Best Structure for You
Choosing to incorporate your business may provide protection over your personal assets, and it also gives you easier access to capital. Another rarely mentioned advantage is with incorporation, you can continue to exist even during and after management or ownership changes take place. In a sole proprietorship or a partnership, the business ceases to exist when the owner dies or leaves the business.
As previously mentioned, and the most notable reason for incorporating a business is the personal protection that it provides to the owners. This separates business debts and obligations from the owner, thus serving as a form of liability protection. By adding LLC or Inc. to the business name, this also adds credibility and name protection. Suppliers, vendors, consumers, and partners usually prefer doing business with incorporated companies.
Both LLCs and corporations may deduct routine business expenses, including salaries before distributing income to owners. When deciding between the various business types, it is suggested to consider which type maximizes your chances of being successful in terms of both financial and operational success. It is a good idea to consult with an attorney or financial accountant to make sure you are choosing the right entity when structuring your company.
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