Inc. vs LLC
If you're considering starting a company and want to choose between an
LLC and
Inc. (corporation), here is what you should know about the differences. A
limited liability company
(denoted by L.L.C. or LLC) is a business structure that provides
limited liability to its owners. This means the business is a separate
legal entity and the owners ("members" of an LLC) are not legally liable
for some acts and debts of the LLC.
Inc. is short for
Incorporated and denotes a C or S corporation.
A corporation also offers liability protection but differs from an LLC
in terms of ownership structure and rules, regulations they have to
follow, management overhead and tax treatment of profits.
Comparison chart
|
Inc.
|
LLC
|
|---|
| Suitable for | Large entities |
Smaller businesses with few shareholders |
| Taxation | Double taxation |
Single taxation - Profit or loss are passed directly to members(top bracket 39.6%). Can elect to be taxed as a corporation. |
| Management Level | Shareholders, Directors, Officers etc |
Only Members and managing members of the company |
| Ownership | Shareholders are owners |
Members |
| Legal entity | Separate entity than members |
Separate entity from partners, but members may be held liable for non-fiscal obligations |
| Choice of taxation structure given | No |
Yes, it is a Single Member LLC - SMLLC or partnership by default, and S or C Corporation (by election) |
| Shareholders meeting | Required periodically |
Not necessary, but should have recorded activities and/or advisory boards |
| Paperwork and records | A lot of paperwork is required |
Not much paperwork is
required. Annual state reports are required to be filed with the
appropriate fee; can file by mail but most states allow or mandate
online filing |
| Members needed to set up | Minimum one |
1 or more |
| Limited Liability | Yes |
Yes |
| Continuity of life | Withdrawal, incapacity, or death of a shareholder does not affect corporation's existence. |
Indefinite term |
| Regulation of entity name | Inc. is added at the end of the name. |
Differs with each state but mostly LLC or L.L.C. is added. |
| Legal agreements | Required for formation |
May not be required in some states. Should have an operating agreement with business records |
| Stands for | Incorporated |
Limited Liability Company |
Contents
- 1 Formation
- 2 Management Structure
- 3 Liabilities
- 4 Assets
|
- 5 Taxation
- 6 Members
- 7 Video comparing LLC and Corporation
- 8 References
|
Formation
LLCs are organized with a document called the "articles of
organization", or "the rules of organization" specified publicly by the
state; additionally, it is common to have an "operating agreement"
privately specified by the members. The operating agreement is a
contract among the members of an LLC governing the membership,
management, operation and distribution of income of the company.
For an Inc., the Articles of Incorporation (also called a
Charter, Certificate of Incorporation or Letters Patent) are filed,
listing the purpose of the corporation, its principal place of business
and the number and type of shares of stock. A registration fee is due
which will usually be between $25 and $1,000, depending on the state. A
corporate name is generally made up of 3 parts: "Distinctive element",
"Descriptive element", and a legal ending. All corporations must have a
distinctive element and (in most filing jurisdictions) a legal ending to
their names. Some corporations choose not to have a descriptive
element.
In the name "ABC Exports Inc." the word "ABC" is the distinctive
element; the word "Exports" is the descriptive element; and the "Inc."
is the legal ending. The legal ending indicates that it is in fact a
legal corporation and not just a business registration or partnership.
Usually there are also Corporate Bylaws which must be filed with the
state. These will outline a number of important corporate housekeeping
details such as when annual shareholder meetings will be held, who can
vote and the manner in which shareholders will be notified if there is
need for an additional "special" meeting.
Management Structure
The structure of the Inc. is as follows:
- Shareholders own the stock of the corporation.
- Shareholders elect Directors (known as the "Board of Directors").
- Directors appoint Officers (President, Secretary, Treasurer, etc.).
- Officers run the company (day-to-day operations).
The owners of an LLC are called "Members" instead of "Shareholders".
Managing members are the individuals who are responsible for the
maintenance, administration and management of the affairs of an LLC. In
most states, the managers serve a particular term and report to and
serve at the discretion of the members. This may be called a Two Tiered
Management structure for LLC's.
Liabilities
In a LLC, Limited liability means that the owners of the LLC, called
"members," are protected from some liability for acts and debts of the
LLC, but are still responsible for any debts beyond the fiscal capacity
of the entity. LLCs in most states are treated as entities separate from
their members, whereas in other jurisdictions case law has developed
deciding LLCs are not considered to have separate juridical standing
from their members.
In a corporation, however, stockholders, directors and officers
typically are not liable for their company's debts and obligations. They
are limited in liability to the amount they have invested in the
corporation. Corporations are separate entities from their shareholders.
Assets
Incorporations and Limited Liability Companies (LLCs) may also hold
personal assets like houses, cars or boats. If one is personally
involved in a lawsuit or bankruptcy,
these assets may be protected. A creditor of the owner of a corporation
or LLC cannot seize the assets of the company; however, they can seize
their ownership shares in the corporation, as that is considered a
personal asset.
Taxation
In the United States, corporations are taxed at a lower rate than
individuals. Also, they can own shares in other corporations and receive
corporate dividends 80% tax-free. There are no limits on the amount of
losses a corporation may carry forward to subsequent tax years. However,
a corporation business structure suffers from double taxation i.e. the
corporation is taxed on the profits it generates. And when it
distributes these profits to its owners (share holders), these
distributions are considered taxable income for each share holder.
An LLC can elect to be taxed as a sole proprietor, partnership, S
corporation or C corporation, providing much flexibility. There is no
double taxation for LLC owners (members) unless they want to be taxed as
a Corporation. LLC members can choose
pass through taxation by
which the LLC itself does not owe income tax on the profits; rather,
these profits are distributed to individual members who then report them
as income on their tax return. Thus double taxation is avoided.
Members
A Corporation can be incorporated with a single person over the age
of 18 years also. A LLC can be started by 1-5 people generally depending
on the state is is set up in.
6:41 PM
Anonymous
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