What Is the Difference Between LLC and Inc?: Everything to Know
LLC and Inc. are both business entities formed by the state. These entities differ in key areas.3 min read updated on February 01, 2023
What is the difference between LLC and Inc? LLC and Inc. are both business entities formed by the state. An LLC is a limited liability company, and an Inc. is a corporation. They both file organizational papers with the state, and their owners receive liability protection. These entities also differ in key areas:
- They vary in tax treatment.
- One has a more formal organizational structure than the other.
- Their ownership distribution rules differ.
What Is a Corporation
A corporation is a business transformed into its own entity, separate from its owner. Sole proprietorships and partnerships are extensions of their owners, whereas structures like a corporation can conduct transactions on its own. Corporations, like LLCs, are business entities that exist outside their owners. Corporate owners are called shareholders.
Corporate owners are called shareholders. There are two types of corporations: A C corporation (C corp) and an S corporation (S corp). A C corporation is also known as a standard corporation. C corporations are subject to double taxation. A corporation can avoid double taxation through an S status election. However, there are other restrictions when a corporation elects an S status.
What Is a Limited Liability Company
A limited liability company (LLC) gives its members flexibility and protection. An LLC provides its owners, called members, limited liability protection while eliminating the double taxation burdens of a corporation. The LLC entity passes through the business structure to the members.
Limited Liabilities Company Benefits
An LLC has four significant benefits:
- Members receive liability protection through an LLC.
- Members are not subject to double taxation.
- Members have flexibility in management.
The LLC's limited liability feature protects members' assets should the business face a lawsuit. If the LLC is sued, the members' assets are protected from seizure to pay off the LLC's debt. Sole proprietorships and partnerships do not protect their owners from personal liability in a suit.
Furthermore, LLCs benefit from pass-through taxation. Profit and losses pass through the LLC to its members. The members will include the gains and losses on their tax returns.
Lastly, an LLC management structure is flexible. LLC members can decide whether they will manage the business or appointment a manager. If the LLC is member-managed, then all the members take part in running the day-to-day business operation. With a manager-managed LLC, not all members participate in managing the business operations.
LLC and Inc. Similarities
LLCs and corporations have several things in common:
- They both must operate in the state they were formed.
- They are both governed by the state they were formed in.
- They both offer liability protection to their owners (corporate shareholders and LLC members).
LLC vs. Corporation Other Key Differences
There are differences between an LLC and a corporation regarding formation, ownership, and taxation:
- Formation. One or more owners (called members) form an LLC. They file articles of corporation with the state. The articles of corporation document forms the LLC. Although the operating agreement is not required, it is highly recommended to create one. The operating agreement outlines the management, the ownership, the role that the members play, and other essential business functions. On the other hand, a corporate formation is more structured. Along with filing organizational papers with the state, a corporation must designate shareholders, create a board of directors to oversee business management, and have at least one formal meeting each year.
- Ownership. Each member in an LLC owns a certain percentage of the business known as "membership interest." An LLC can distribute membership however it wants; however, it is hard to transfer member interest. Corporate entities issue shares to their shareholders. Shareholders can easily transfer their shares.
- Taxation. LLCs have a different tax treatment than a corporation. Single member LLCs are taxed like a sole proprietorship while multi-member LLCs get the same taxation treatment as a partnership. On the other hand, a shareholder is subject to double taxation — on an individual level (payroll tax) and corporate level (dividend distribution).
LLCs and corporations are structures that exist for distinct reasons. Knowing your needs (for instance, whether you need outside investors or a flexible management structure) will help you form the structure that fits your business requirements.
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