Inc vs. LLC

So you've decided to step up your entrepreneurial endeavors. Fantastic! Whether you're launching a new company or taking your small business to greater heights, the entrepreneurial journey is exciting. However, it can also be overwhelming, especially when it comes to choosing an entity type for your business. 

Most entrepreneurs switch from sole-proprietorship or general partnership to a recognized entity like Inc or a limited liability company (LLC) to take advantage of their benefits, such as liability protection and tax savings. But what is an LLC? How about Inc? And how do these two entities compare? Benzinga breaks down the unique features of Inc vs LLC, providing you with excellent resources needed to make informed decisions when choosing an entity type for your business. Let's dive in.

What Does Inc Mean?

Inc. is short for "incorporated," indicating that a business is a corporation — C or S corporation. Incorporated implies that the company has filed "Articles of Incorporation" and other requisite documents with a state to become a corporation and, by that, has become legally separate or distinct from the owner or owners. Other alternative abbreviations often used at the end of a business name to indicate that it is a corporation are "Corp" and "Co."

A corporation is a business structure or entity that grants owners personal liability protection. So, if the business fails, goes bankrupt or gets sued by creditors or for damages, the owner's assets remain unexposed to risks. As a legally distinct entity, a corporation can hire workers, sign contracts with firms, borrow and loan money and sue or get sued independently. In comparison, sole proprietorship and general partnership are extensions of the owners. Corporation owners are called shareholders. A shareholder is someone with at least one share of the company's stock.

A corporation must issue shares of its stock to the shareholders and woo outside investors. These can include the common and preferred stock for C corps (or general corporations) and either common or preferred stock for S corps. By default, a corporation is taxed as a C corp and subject to double taxation (on corporate and personal income levels). However, a C corp can elect to be taxed as an S corp, which is pass-through (if it qualifies). A corporation is managed by a board of directors elected by the shareholders.

What Does LLC Mean?

LLC (or L.L.C), often found at the end of a company name, indicates that such a business is a limited liability company. A limited liability company is a business structure that provides its owners limited or personal liability protection while eliminating the burden of double taxation peculiar to general corporations or C corp. An LLC is a pass-through tax entity, just like a sole proprietorship and general partnership. In a pass-through system, the business income is not taxed at the corporate level. Instead, owners report their shares of profit and losses from the business on their personal tax returns. 

LLC owners can also elect to be taxed as a C or S corporation. This factor enhances flexibility in tax options while streamlining the filing processes. Furthermore, LLCs offer highly flexible management structures and simplified formation processes. It is relatively easy and cheap to maintain compared to other entities, which makes it popular among entrepreneurs and small-to-medium-business owners. Owners of an LLC are known as members, which may be one person — single-member LLC — or several people — multiple members LLCs. 

There's no limit to the number of memberships, meaning it can be as large as a corporation or small as a sole proprietorship. But regardless, it remains a separate or distinct entity. LLCs are often managed by the members (member-managed), in which case no distinction exists between the managers and the members. Members can also appoint a manager to oversee the business (manager-managed). LLCs cannot issue shares of their stock to attract outside investors. Instead, it relies on individual members for funding, making growth difficult. 

Differences Between Inc and LLC

An Inc and an LLC differ in various aspects. Here are some of the core differences.

1. Ownership 

Owners of a corporation are called shareholders. A corporation issues shares of its stock to shareholders and outside investors. This process includes common and preferred stock for C corps and either of the two for S corps. The ownership stake depends on the number of shares a given shareholder holds. For instance, having a 50% share of a corporation means you own half of the company, and you're entitled to 50% profit or losses. Shares of a corporation are easily transferable between shareholders and outsiders. 

In contrast, LLCs are owned by members, and the designated percentage of the business owned is called membership interest. Unlike corporations, membership transfer is difficult except as stipulated in the operating agreement. Profit allocation and ownership stakes are not based on members' capital contributions. LLCs cannot make a public offer for potential ownership investment, making funding and expansion difficult. Corporate entities exist perpetually, while an LLC may dissolve when a member leaves. 

C corps and LLCs have no restrictions regarding the number of members or shareholders. An S corp is limited to 100 shareholders, among other limits outlined by the IRS. 

2. Taxation

Corporations are taxed as a C corp. They pay federal income taxes on profits at the corporate level, and shareholders pay taxes on distribution (or dividends) at the personal income level. This process is called double taxation. However, a corporation can elect to be taxed as an S corp if it has fewer than 100 shareholders and satisfies other core requirements outlined by the IRS. An S corp is classified as a pass-through entity for tax purposes. 

Pass-through entities are not subject to taxation on the corporate level. Instead, shareholders' shares of the company's profit and losses are passed through and reported on their personal income tax returns. Like an S corp, an LLC is also a pass-through entity. However, they offer more flexible options. Single-member LLCs are, by default, taxed as a sole proprietorship, while multiple members are taxed as a general partnership. An LLC can elect to be taxed as a C corp or an S corp if it satisfies the IRS requirements. Electing to be taxed as an S corp can help an LLC save on self-employment tax. 

3. Management Structure 

Corporate entities have robust and rigid management structures. The board of directors is elected by the shareholders and oversees corporate affairs and core decision-making. The company's day-to-day operations are handled by corporate officers (president, secretary, treasurer and so on) appointed by the directors. In a small corporation, one person can serve multiple functions. 

LLCs have more flexible structures. The members themselves can manage it (member-managed), or the members can appoint a manager or group of managers to oversee operations (manager-managed). Manager-managed LLCs can be made up of investors having no active roles in the daily operations, unlike member-managed LLCs.

4. Compliance requirements 

As a state creation, LLC and Inc companies are subject to state rules, regulations and compliance requirements. However, corporations have stricter compliance requirements regarding reporting and record keeping than LLCs. For instance, corporations must issue stock, adopt bylaws, hold annual shareholder meetings (with every detail documented in the corporate minutes) and file annual reports with fees. LLCs are not mandated to hold meetings; annual report filing is optional in most states. 

5. Formation

To form an LLC or Inc, you must submit the requisite legal documents to the Secretary of State. For an LLC, you'll need to file the articles of organization (also referred to as a certificate of organization). At the same time, an incorporated company must file articles of incorporation (also called a charter, letters patent or certificate of incorporation). Incorporated businesses require more documentation to form and maintain their status than LLCs.

Similarities Between INC and LLC

Despite the differences, Inc and LLCs have many commonalities. Let’s review some of the similarities.

1. Personal liability protections 

LLCs and incorporated companies operate as legally distinct or separate entities from their owners, which helps protect members' and shareholders' assets when the business faces a lawsuit. If your company gets sued, your personal assets cannot be used to pay off the debts.

2. Taxation 

C corps are subject to double taxation (personal and corporate income taxes), but other Inc types like S corps are pass-through entities like LLCs. Profits or losses from S corp and LLCs are pass-through and reported on the owner's income tax return, eliminating double taxation and rendering corporate tax irrelevant. Like an LLC, a C corp can also elect to be taxed as an S corp. 

3. Assent to state laws

Although incorporated companies are subject to stiffer compliance rules by the state, LLCs and corporations are bound to follow applicable state and federal laws. Besides filing annual reports, holding meetings and maintaining accurate records, it also means staying up to date on federal and state fees and taxes and remaining mindful of regulations.

4. Formation or registrations 

While incorporated companies may need more documentation than LLCs, the registration process is similar. The articles of incorporation for corporations contain almost the exact details as the articles of organization for LLCs. The bylaws are to corporations what operating agreements are to LLCs. Filing fees also apply in both cases.

5. Perpetuity

Inc and LLCs can have perpetual existence, which means they can continue to exist if shareholders or members exit the company. However, this designation has to be specified in the operating agreement for LLCs. 

Ready to Build a Robust, Credible, and Successful Company? Incorporate Now and Simplify Your Entrepreneurial Journey!

Inc and LLC companies are business entities offering various benefits, including personal liability protection. The decision regarding which one to choose will depend on the long- and short-term goals of the company you're creating, the tax consequences and other factors.  

Although an LLC is considered ideal for small businesses looking to save on taxes or enjoy limited liability protection and flexible management, if you're planning to scale up quickly and become a giant organization, Inc is the way to go. Either way, incorporating your business is the first step towards building a strong, reputable and credible brand, which is the recipe for profit maximization and business success.

Frequently Asked Questions