Which is Better LLC or INC: Everything You Need to Know
Which is better, an LLC or Inc?There are three types of U.S. business entities most startup owners will consider: LLC, C-corp, and S-corp. 3 min read
Which is better, an LLC or Inc?There are three types of U.S. business entities most startup owners will consider: LLC, C-corp, and S-corp. LLC stands for limited liability company, and the abbreviations “inc.” and “corp.” stand for a corporation.
When deciding between an LLC, C-corp, and an S-corp, consider whether you will be seeking outside investors and if the company will be generating a profit soon.
What Is Incorporation?
If you choose to incorporate a business, you move from a sole proprietorship or general partnership into a company that’s recognized by a state of incorporation. This makes it a legal business entity that is separate from those who founded it.
This new structure falls into one of two categories:
- A limited liability company (LLC)
- A corporation (corp).
The two types of corporations are an S corporation and a C corporation. There are many benefits to incorporation, such as being protected from personal liability and having credibility with your customers. There are also specific pros and cons to each incorporation type.
LLC, S-Corp, and C-Corp
An LLC is a simple way to start a business. There’s less paperwork needed to form it, and it’s a legitimate corporate entity. An LLC is official once the articles of organization are complete and any applicable notice requirement is met.
Many LLCs use operating agreements to establish the role of its members. If there’s no operating agreement, the LLC reverts to the default rules in the state statutes. While this is not necessary for it to be valid, it is a good practice that establishes the rights and responsibilities of the members. It defines the business relationship and deals with issues of:
- The allocation of profits and losses
- Provisions for the death of a member
- Provisions for a buyout
- Other considerations.
A limited liability company has various benefits, including:
- Protecting business owners from being personally liable for the actions of the business.
- Protecting your personal assets if a lawsuit involving the business occurs.
- Flexibility in management, unlike the rigid structure of a corporation.
- Pass-through taxation, which means the income and loss pass through your personal tax return, as opposed to the business.
Differences Between an LLC and an Incorporation
Businesses tend to have abbreviations like LLC or Inc., but what do they mean? What are the differences between an LLC and an Inc.?
These letters may be confusing, but they simply stand for the different types of business entities. An LLC is a limited liability company, while Inc. and corp. are for corporations.
Forming corporations and LLCs require paperwork with your state. They also protect their founders from liability related to business. They are managed, owned, and taxed differently, however, and have different reporting and recordkeeping obligations.
Inc. Versus LLC: Liability Protection
With LLCs and corporations, the owners are shielded from being personally liable for business debt or legal issues. If the business is in collections from creditors or is being sued, your personal assets, such as your house or car, are protected. The only thing you could lose is your business investment.
So, which is right for you? As an owner, you have the same liability protection with either entity.
Corporation Versus LLC: Taxes
There are two ways corporations are taxed:
- A C corporation pays taxes on profits. Shareholders pay personal tax on the dividends they receive. This is a double taxation on dividends, which many find undesirable.
- An S corporation doesn’t pay corporate tax. They have a pass-through taxation setup. This means the profits move to the shareholders and to their personal income tax. Only certain corporations are eligible for S designation.
By comparison, LLCs don’t have a specific tax classification. Single-member LLCs are taxed as sole proprietorships, while multimember LLCs are taxed as partnerships.
An LLC’s tax information is recorded on the member’s personal tax returns, and he or she pays taxes on his or her share of the profits. An LLC can elect C- or S-corporation taxation if they qualify.
Here are some things to keep in mind:
- Outside investors may prefer a C corporation.
- S corporations can help small businesses save on taxes. However, a C corporation is best if you plan to retain cash within the company, as opposed to distributing it to the owners.
- LLCs have pass-through taxation without ownership restrictions.