Choosing the right business entity — more specifically, an LLC versus a corporation—is an important step in setting up your business, as it protects you from liability and ensures you have the right structure to meet your business size and needs. Whichever you choose, either will offer plenty of advantages such as offering more credibility to your newfound company.
LLCs and corporations (sometimes referred to as an inc.—short for incorporated) are distinct classifications that offer their own strengths and weaknesses. So which one is best suited for your needs? Let’s take a look at the basics to help you decide. Knowing and appreciating the difference between an LLC vs an inc. can save your team a great deal of stress in the future.
Limited Liability Companies (LLCs) Versus Corporations
Both these business types will require you to file business formation documents with the state and offer liability protection. The main difference between an LLC vs a corporation is focused on who’s serving as the legal owner of the entity.
An LLC is owned by one or more individuals, whereas a corporation is owned by shareholders that may or may not work outside of your company. There are different types of corporations, including S-Corps, C-Corps and B-Corps, each with its own specific management and tax structures.
LLC tends to have fewer recordkeeping requirements and more flexibility in terms of management and taxation. Incs require more paperwork and administrative requirements, but it offers the ability to transfer shares if you’re interested in having outside investors.
Let’s take a closer look at the differences.
Ownership Structure
An LLC consists of members, or owners of the company. Each individual owns a percentage of interest in the business. Other corporations and foreign individuals can also own LLCs, making it a great choice for those who require this type of flexibility.
The ownership of an LLC is outlined in the business’ operating agreement—details include the percentage each member owns, how the business is run, and how to dissolve the LLC. In most cases, the LLC needs to be dissolved if a member leaves, with the remaining owners forming a new LLC if they wish.
A corporation is different from an LLC in that shareholders own percentages of the business by holding on to shares of their stock. Shareholders can then purchase or sell their stocks as they wish. There are also different kinds of corporations.
For example, an S-Corp has the business owner as the sole shareholder, who owns 100% of the business. The idea here is to separate the entity of the business from the individuals, so that if new shareholders want to join, or someone wants to leave, the business can remain intact.
Management
Members tend to manage LLCs and typically use formal business titles, like CEO or marketing manager. These entities operate much like what you would see in a business partnership. LLCs tend to involve far less paperwork than corporations.
In most cases, corporations operate with a much stricter management structure than LLCs, with a board of directors overseeing the businesses and officers who manage daily operations. Paperwork and record-keeping for things like shareholder meetings and annual reports is extremely important with corporations.
Taxes
Taxes are perhaps the most important of all the distinctions because it influences when and how you file. LLCs generally offer the most flexibility because you can choose to report income as part of the owner’s personal return or as a multi-member partnership
The tax structure for corporations will depend entirely on the type of corporation you file. For example, S-Corps count as a flow-through entity similarly to LLCs since shareholders are the ones who pay taxes as individuals—the corporation itself isn’t taxed.
Shareholders need to be paid a salary and can deduct the cost of benefits from their taxes, such as healthcare. The main benefit of an S-Corp is that shareholders can avoid high tax rates on an individual level if the salary is lower than business profits.
On the other hand, C-Corps are taxed as a separate entity. They pay corporate taxes and offer the largest range of tax deductions, such as employee benefits. For instance, owners can set up employee benefits such as retirement accounts and deduct the costs of running these programs from corporate taxes.
Shareholders may pay individual taxes on dividends distributed from the business. Additionally, B-Corps are taxed according to whatever entity structure you declare to the state. Be mindful of what type of corporation you file, as it will have great implications for your overall tax responsibilities for the year.
LLC Versus Inc: Legal Liability
All registered businesses need to meet certain requirements dictated by the entity’s state to maintain liability protection and keep it in good standing. Corporations typically have more legal requirements than LLCs.
Most states require LLCs to have a registered agent and file an annual report or franchise tax reports to maintain an active status. The annual report form will ask you to ensure you have updated information pertaining to your business and you will have to pay a filing fee. Some states require this to be completed every other year.
Corporations also need to file an annual report. However. additional documentation needs to be maintained as well. This includes corporate minutes, details on annual shareholder meetings, and information on its board of directors. There may be additional paperwork required, such as B-Corps needing to undergo a verification process and proof it’s meeting transparency requirements.
Frequently Asked Questions (FAQs)
Business owners that want to scale their business by hiring employees and taking on outside investors are best suited for a corporation. Entrepreneurs who prefer to be classified as a personal service corporation (PSC) would do better with an S-Corp designation, whereas those who want to create a business that upholds their commitment to a positive impact on society and the environment may want to consider a B-Corp designation.
Both LLCs and corporations offer myriad tax benefits. An LLC is taxed as a pass-through entity, meaning that profits are passed onto the owners and reported on individual tax returns. It’s much simpler to file taxes this way.
Corporations are taxed as a separate entity and pay according to their profits and dividends to shareholders. Unlike LLCs, corporations have additional federal deductions which can be used to offset taxes.
LLC is short for limited liability company. Inc. is short for incorporated, which means the company is a corporation.
An LLC can be owned by one or more people working for the company and typically have lighter legal and tax requirements, whereas a corporation may be owned by several shareholders that may or may not work for the company. There are different types of corporations, including S-Corps, C-Corps and B-Corps, each with its own specific management and tax structures.
