LLC vs. Inc. — What’s the Difference?
Choosing your business structure is one of the most important decisions you’ll make because it not only determines how you can name your business but also how it'll be taxed. In addition, this decision will impact your business’s liabilities, management structure, and the regulations and laws it must follow.
Two of the most common business structures include the limited liability company (LLC) and the corporation (Inc.), but how do you know which one is right for you? Understanding the difference between LLC and Inc. can help you make the right decision for your business.
Read on to learn more about what an LLC and an Inc. are, their similarities and differences, and which one might suit you best.
Ready to launch your business? We recommend using a professional formation service to file your paperwork and get your LLC or corporation (Inc.) off the ground in no time.
What Is an LLC?
An LLC is a type of business structure chosen by many business owners. It's a legal entity you can own and operate to separate your personal assets from your business assets.
An LLC has many of the same benefits as a corporation but without the required restrictions and tedious amount of paperwork. The LLC business structure also can provide your business with some tax benefits because it’s a pass-through entity (PTE). This means its profits and losses pass through to the owners’ personal tax returns so they only pay the personal income tax in their state.
Moreover, by choosing to form your business as an LLC, you can protect your personal assets against any debts or legal action someone may take against your company.
LLC Structure
The LLC business structure allows you to easily form your new business and requires minimal ongoing paperwork to keep it in good standing.
The owners of an LLC are considered members. If you’re the only owner, your LLC is a single-member LLC. If your LLC has more than one owner, it’s a multi-member LLC.
LLCs also have a say in how their operations are managed. As the name suggests, a member-managed LLC disperses the management of the business amongst its members. Each member has a say in the operations. In contrast, a manager-managed LLC allocates the management power to one or more specific individuals. This could be members of the LLCs or an outside party.
Pass-Through Taxation
Because an LLC is a pass-through entity, its income passes through the business to its individual owners. This means each owner will claim their share of the LLC’s gross income on their personal tax return and pay the required personal tax rate in their state.
If you have a partnership, the LLC will divide its income among all members, with each claiming a percentage of the earnings on their personal tax return. This allows you to avoid certain corporate income tax rates, saving you money during tax season.
Forming an LLC
To form an LLC, you’ll need to file the Articles of Organization in the state where you want to start your business. The Articles of Organization include information about your business, a business plan, the members, and the business structure.
An LLC’s governing document is known as an “operating agreement.” This describes, in detail, all the members of your LLC, their roles, and the percentage of profits and losses allocated to each LLC member. Though not all states require this document, it’s a good idea to draft one.
Ready to form an LLC? Our Step-by-Step LLC Guide will walk you through the process, and you can have your business up and running in no time.
What Does ‘Inc.’ Mean?
Inc. is short for “incorporated” and a common abbreviation for businesses considered corporations.
Incorporating a business involves formally designating it as a corporation under the laws of at least one state. This means the company is an entirely separate entity from its creators. People can buy shares in a corporation and these shareholders can then vote on decisions about how the business operates.
Corporation Structure
There are two main types of corporations: C corporations (C corps) and S corporations (S corps). A C corp is the default type of corporation you create when you form a business, while an S corp is a tax designation usually chosen by smaller businesses.
In a corporation, the liability of its individual owners and employees is minimal in the event of legal action against the company. A corporation also is responsible for paying taxes at the corporate level and for its debts. A corporation can continue to operate long after the death of an individual director or owner as well as the sale of the company’s shares.
Forming a Corporation
When people talk about corporations, they are often referring to traditional C corps. If you choose to incorporate your business, you must file all legal documents to operate as a corporation. Incorporating your business requires more initial and ongoing paperwork than forming and running an LLC. Typically, large businesses searching for investors choose the corporate business structure because it often benefits them more than an LLC would.
When incorporating your business, you’ll have to choose a board of directors and draft bylaws.
- Your directors each have shares allocated to them and share in the responsibility of the business’s operations.
- Your bylaws are the governing documents for your corporation. These are required by law in most states.
Ready to form a Corporation (inc.)? Our Step-by-Step Corporation Guide will walk you through the process, and you can have your business up and running in no time.
Similarities and Differences Between an LLC and an Inc.
While these are two of the most common business structures chosen by business owners, each one provides your new venture with enhanced credibility and benefits that can help you drive its growth. Understanding the similarities and differences between the two can help you decide how to form a business that’ll best meet your needs.
Liability Protection
When it comes to liability protection, LLCs and corporations are fairly similar. Structuring your business as an LLC or a corporation can protect you against personal liability should your business incur debt or face legal action.
LLCs and corporations exist as separate entities that manage business assets and debts. For the business owners, their only liability is what they originally invested in the business.
Owners and shareholders are traditionally protected by an LLC or corporate business structure. However, they could be personally liable if they become involved in any breaches of the business’s operating agreement or fraudulent activities.
Formation
There are many similarities and differences in the formation of corporations and LLCs. To create both business structures, you must file the required documents with the state — usually with the Secretary of State in your home state.
For example, an LLC must file the Articles of Organization (also known as a Certificate of Organization). It's a simple document that requires less information than what a corporation has to provide. Within your Articles of Organization, you need to include your business’s information as well as its operating agreement, which outlines its management structure and the responsibilities of all members.
On the other hand, you’ll need to file Articles of Incorporation (also known as a Certificate of Incorporation) to form a corporation. This document is typically more detailed and outlines all governing provisions and the statutory requirements your corporation must follow, including outlining the directors and establishing stock conditions.
Taxes
LLCs are pass-through entities, which means the business’s income passes directly through to its owners, who then claim the income on their personal tax returns. This allows them to only pay taxes for the business on their personal tax returns — at their personal income tax rate. Some states may require LLC members to also pay self-employment taxes on top of personal income tax.
Corporations, on the other hand, pay federal income tax on their corporate profits. In addition, all of their shareholders must pay taxes on the dividends they receive. This is often considered double taxation, which can create a larger financial burden than that of an LLC.
Management
Corporations tend to be larger businesses and have a more rigid management structure. They have a board of directors that oversees the business and decides the policies the company will follow. Appointed managers run a corporation’s daily operations. Shareholders can serve as managers and directors in smaller corporations, while directors are less likely to get involved in the operations of larger corporations.
Traditionally, LLCs are smaller businesses that can have one or multiple owners. In many LLCs, the owners have more flexibility in managing the business, choosing whether to be member-managed or manager-managed.
Reporting and Recordkeeping
LLCs and corporations must comply with the laws and regulations set by the state in which they’re formed. Every state has its own rules regarding paperwork and reports that businesses need to file each year. When it comes to paperwork and recordkeeping, most states impose more requirements and regulations on corporations.
Corporations are larger businesses with more shareholders. As such, they must hold an annual shareholder meeting to discuss the company's operations. They have to record every action and resolution from these meetings in corporate minute books.
LLC owners have fewer requirements and more flexibility when it comes to managing the business. Recordkeeping, such as meeting minutes, isn’t traditionally required, and some states don’t even require LLCs to file an annual report.
What Are the Benefits of an LLC?
An LLC is an easy-to-manage business structure that protects your personal assets and allows you to focus on growing your business. This business structure offers a number of benefits, including:
- Personal Liability Protection: Personal liability protection is one of the most significant advantages of creating an LLC. The LLC business structure protects an owner’s personal assets and finances from the company’s debts and any damages stemming from legal action taken against the business.
- Tax Incentives: An LLC is a pass-through entity, which means all of the business’s profits and losses pass through to its members’ individual tax returns. Those members then pay taxes on their share of the income at their personal tax rate set by the state in which they live.
- Affordability: LLCs are generally affordable to create and maintain. The cost of the fees can vary, though, depending on the state in which you form and operate your LLC.
- Simple Formation Process: Compared to corporations and other business structures, LLCs are relatively easy to form with minimal paperwork and quick turnaround times. LLCs also face fewer regulations and require less ongoing paperwork throughout the years in which they operate. The exact requirements and regulations will vary based on your business’s location.
- Flexibility: Small business owners have the ability to decide how they want to manage their business. Members of an LLC can act as managers who run the business's daily operations. Alternatively, they can delegate that role and elect managers, who may or may not be members, to take on the active responsibility of the business’s operations.
- Credibility: An LLC provides your business with more credibility than a sole proprietorship or a partnership. That means customers are more likely to purchase your products or services and other businesses will be more willing to partner with your company.
What Are the Benefits of a Corporation (Inc.)?
Incorporating your business also comes with a range of benefits, including:
- Liability Protection: Like many other business structures, a corporation provides you with liability protection. The limited liability protects the business owners' and shareholders' personal assets and finances by creating the business as a separate entity.
- Tax Benefits: Though corporations experience what’s known as “double taxation,” many tax benefits, deductions, and credits are available to an incorporated business. You can leverage these tax incentives against the operational costs that enable your business to grow.
- Raising Capital: Incorporating your business makes it easier to raise the capital you need for business expenses that’ll help your business grow. Incorporation provides credibility that allows you to access more business loans and attract potential investors.
- Credibility: Incorporating your business provides a level of credibility and legitimacy that customers, other businesses, and investors can trust. It also ensures no other businesses can open using the name you chose for your business.
Which Business Structure Is Best for me?
Both LLCs and corporations protect their owners and shareholders from personal liability, and understanding their tax obligations, requirements for operation, and rules and regulations can help you choose which business structure will best suit your needs.
Recommended: Save yourself the hassle and use a professional formation service to form your LLC or corporation (Inc.). A formation service will save you time and allow you to get started on what matters most — running your business.