What is an LLC and an INC? Determining Your Entity Type
When you’re setting out to start a new business, one of the first things you need to do is choose an entity type. Most entrepreneurs choose between a Limited Liability Company (LLC) and an Incorporated Company (INC). Both of these business types will require you to file business formation documents with your state and both protect company owners from personal liability for business obligations. In general, corporations have a more rigid operating structure and more reporting and recordkeeping requirements than LLCs whereas LLC owners have greater flexibility in how they run their business.
The main difference between the two is that an LLC has a limited ownership by one or a few individuals while a corporation is owned by its shareholders. Each entity offers benefits for your business by allowing you to establish credibility in the marketplace, as well as providing liability protection.
Key Differences Between an LLC and a Corporation
- LLC stands for Limited Liability Company, while Inc. stands for Incorporated.
- LLC owners are called members, while Inc. owners are called shareholders.
- LLCs have more flexibility in tax treatment, while INCs are subject to corporate taxation.
- LLCs have a less formal organizational structure, while INCs have a more rigid hierarchy of directors, officers, and employees.
- LLCs can distribute ownership in any way they choose, while INCs have to follow the rules of stock issuance and transfer.
Similarities Between an LLC and a Corporation
- Both are business entities that are created by a state filing.
- Both provide limited liability protection to their owners.
- Both require a registered agent in each state where they do business.
- Both must maintain state compliance, typically by filing annual reports.
- Both are separate legal entities from their owners.
Pros and Cons of an LLC vs a Corporation
To help you identify the benefits and drawbacks of an LLC and a Corporation, we’ve created a guide to the advantages and disadvantages of each from a setup, organizational efficiency, and tax standpoint. Having a greater understanding of the ways in which each entity impacts your day-to-day operations and financial future will allow you to make the best decision for your business.
| LLC | Corp | |
|---|---|---|
| Pros | – Pass-through taxation (no need for separate return) – Personal liability protection for owners – Less paperwork – Lower filing costs – Simpler operating structure – No limit to the number of owners – Members can receive revenues higher than ownership percentage (unrestricted pay) – Easier to start than a corporation – Members can have full control over the operation and final decisions – Easy to maintain – Ability to change tax structure | – Liability protection to shareholders – Easier to attract investors – Easier to lower tax burden – Easier to transfer ownership – Can exist forever – Stock options can help attract top-level talent (employees) – Ability to sell stock – Well-established business structure |
| Cons | – Members are subject to self-employment taxes – Automatic dissolution can be triggered in certain circumstances (e.g., death of a member without provisions in the operating agreement) – Can be difficult to raise capital from outside investors – Excise taxes – Can’t issue stock – Can’t use corporate income splitting to reduce tax liability | – Possibility of double taxation – Limited number of shareholders (for S corps) – Strict regulations and less flexibility – More expensive and time-consuming to start – Large amount of paperwork |
As you can see from the chart, taxwise, LLCs have more options than corporations. LLCs aren’t tied to one particular tax classification and can be taxed as sole proprietorships, partnerships, C corporations or S corporations.
What is a C Corp vs an S Corp?
A C corp is a company that shareholders own. The company itself is liable for legal and financial issues and is directly taxed on profits while shareholders are taxed on dividends. This results in what’s known as “double taxation” because the income is taxed at both the corporate and personal level. A C corp structure is a good choice for startups with long-term goals of going public or for businesses requiring ample investment capital.
An S corp is not an official business entity. The term refers to the way in which the business chooses to be taxed. The IRS classifies an S corp under subchapter S of the Internal Revenue Code. The biggest advantage of choosing S corp status is that S corps are taxed like partnerships, so they aren’t taxed twice. Instead of the company itself being taxed, income passes through the business to its shareholders. The shareholders then report their income on personal tax returns, and the income is then taxed at the shareholder’s rate.
What’s Next For Your Small Business?
Now that you have a clearer picture of the different ways in which you can form your company, you can begin the process of setting up an LLC or incorporating your business. Take into consideration your long-term goals and assess which tax structure best helps you achieve them.
Whichever you choose, Quill can help keep your business solvent with a vast selection of office essentials, furniture, technology solutions, and more that let you maximize your budget and maintain a positive cash flow. We also offer extensive resources for small businesses on our blog to arm you with the best tools and tips to be successful. And you can always reach out to one of our procurement professionals at 800.634.4809 for custom pricing tailored to your individual needs, large volume quotes, and streamlined purchasing and savings analysis to ensure you spend within your budget. At Quill, your bottom line is always our top priority.