Table of Contents
There are several types of business structures that are used in the U.S., and two of the most common types are the limited liability company (LLC) and the incorporation (Inc.). Although they’re both accepted business structures, the way they’re taxed, their management structures, and their capital options are different. Read on to learn more about the differences between an Inc. and an LLC.
Key Points
• Limited liability companies (LLCs) combine features of corporations and sole proprietorships or partnerships, giving owners limited liability protection so personal assets stay safer from business debts and legal issues.
• Incorporation creates a separate legal entity from its owners (shareholders), also providing liability protection.
• One difference between an Inc. and an LLC is that the former follows a formal operating structure with a board of directors and officers, while the latter uses flexible management defined by an operating agreement and is run by members or appointed managers.
• An inc. vs. an LLC can raise funds by selling stock and continue existing regardless of ownership changes.
• LLCs may suit small businesses wanting flexibility and lower costs, while incorporation can better serve companies focusing on large-scale growth, fundraising, or going public.
What Is an LLC?
A limited liability company (LLC) is a business structure in the U.S. that combines some features of a corporation and a partnership or sole proprietorship. LLCs have limited liability protection. That means that owners, also known as members, aren’t personally liable for the company’s debts or liabilities. If the business has financial difficulties or legal issues, the members’ personal assets are protected.
What Is Inc.?
Inc. stands for incorporated. Incorporation is the legal process of forming a corporation. It creates a new legal entity that is separate from its owners, who are known as shareholders. After a company is incorporated, it’s typically identified by “Inc.” after its name, which indicates that it’s a corporation.
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LLC vs. Inc.: Key Differences Compared
There are some key differences between LLCs and corporations. Here’s a deeper look at some of the most significant ones.
Ownership and Management Structure
LLCs are owned by members, who hold varying percentages of ownership. The management structure for LLCs is flexible, as it’s managed by the members or appointed managers. The management structure for every LLC will be defined by an operating agreement.
Corporations are owned by shareholders, and ownership is represented by stock. The management structure is formal, and it is managed by a board of directors elected by shareholders, who appoint officers for daily operations.
Taxation
An LLC is taxed by pass-through taxation as a default, but it can elect to be taxed as a partnership, sole proprietorship, S corporation (S corp), or C corporation (C corp). C corporations are subject to double taxation, since corporations pay taxes on profits and their shareholders also pay taxes on the dividends they receive. However, an S corp election can avoid double taxation.
Liability Protection
What are the differences between an LLC and an Inc. when it comes to liability? Both business structures offer limited liability protection, since owners’ personal assets are protected from business debts and legal issues. However, since LLCs typically have looser operating requirements, they can offer slightly less likelihood that courts will “pierce the corporate veil” to hold owners liable.
Raising Capital
Depending on its operating agreement, an LLC may be able to raise capital through member contributions, adding new members, or an LLC business loan.
You can even loan money to your own LLC.
Corporations can raise capital by selling stock to investors. Corporations also have access to public markets. Corporations that aren’t publicly traded can get investment from private equity firms or through venture capital investments. And if they meet size standards, corporations can take out small business loans.
Bear in mind that neither an LLC or an Inc. can take out the following kinds of loan.
• Loans for sole proprietors
• Partnership business loans
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LLC vs. Inc.: Pros and Cons
Each type of business structure has both advantages and drawbacks.
| Limited Liability Companies (LLCs) | Corporations (Inc.s) | |
|---|---|---|
| Pros | Give owners personal liability protection | Give owners personal liability protection |
| Provide default pass-through taxation | Can raise funds by selling stock | |
| Have fewer restrictions on how the company must be run | May appear more credible | |
| Offer more flexibility on owner requirements | Can continue to exist after membership or management changes | |
| Cons | May mean members have to pay self-employment tax | Must abide by strict requirements ruling directors, officers, and shareholders |
| May have a limited lifespan in some states | Face double taxation — if they’re C corps | |
| May have to dissolve if a member dies or withdraws | Have restrictions on shareholders and how profits are distributed — if they’re S corps |
The pros of forming an LLC include protection for owners from personal liability for business debts and claims, no requirement to hold annual meetings or record minutes, fewer restrictions on who can own an LLC and how many owners it can have, and a default pass-through taxation.
A significant con of forming an LLC is the fact that members of an LLC are often considered self-employed and must pay self-employment taxes on their share of the profits. Another con: In some states, LLCs might have a limited lifespan or need to dissolve upon the death or withdrawal of a member.
The pros of incorporating include the fact that shareholders of a corporation are typically not personally liable for business debts and liabilities, corporations can raise funds through the sale of stocks, corporations continue to exist even if ownership or management changes, and incorporating can provide an impression of greater credibility.
Cons of incorporating include that corporations face stringent regulatory requirements and a formal structure of directors, officers, and shareholders. C corporations are subject to double taxation, and S corporations have restrictions on the number and type of shareholders they can have and how profits are distributed.
Which Is Better for Your Business: LLC or Inc.?
An LLC is often a better business structure for small, flexible businesses who want flexibility and lower costs. An Inc. vs. an LLC is often better for large-scale growth, fundraising, or going public.
Be sure to compare the pros and cons of each structure to decide which one is better for your business. You might also consult with a lawyer or CPA to help you decide.
The Takeaway
LLCs and Incs have different positives and negatives. Deciding which structure is better for your business will depend on many factors unique to your business.
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FAQ
Can an LLC become an Inc.?
Yes, it is possible for an LLC to convert to a corporation and be considered legally incorporated.
What does “Inc.” stand for?
“Inc.” stands for incorporated. When it follows a business’s name, it indicates that the company is legally a corporation.
Is an LLC cheaper to form than a corporation?
Costs of forming an LLC and forming a corporation are typically fairly similar. However, LLCs tend to have less complicated taxes and fewer compliance requirements, so maintaining them generally costs less.
Can a single person form an LLC or an Inc.?
Yes, a single person can form a single-member limited liability company (LLC) or an Inc. in the U.S.
What is the main tax difference between an LLC and an Inc.?
LLCs are taxed via pass-through taxation as a default, but an LLC can elect to be taxed as a partnership, sole proprietorship, S corp, or C corp. Corporations are subject to double taxation, since the business pays taxes on profits while shareholders also pay taxes on the dividends they receive. However, S corps can avoid double taxation.
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