Legal business entities can be structured in a number of ways, and each has its advantages. As a new business owner, you want to find the business entity that will afford you the most protections without adding extra responsibilities or making excessive demands on your time and resources.
The abbreviations LLC and INC represent different types of business entities. “LLC” stands for “limited liability company.” The abbreviations “inc” and “corp” represent a corporation. Both LLCs and INCs require you to file forms with your state to establish your company as a legal entity. Both entities protect owners from liability for business obligations. But the similarities stop there.
The two business structures are different in the way they are owned, managed and taxed, and they each have different requirements for record keeping and reporting.
- Corporate owners are called shareholders because they own a percentage of stock in the company, called shares. Stocks are easy to exchange and can be transferred from one shareholder to another with little difficulty. Forming a corporation is a good idea if you plan to make a public stock offering in the future, or if you have outside investors.
- LLC owners are called members, because they each own a designated portion of the company, which is sometimes referred to as a membership interest. Terms of transferring membership interest must be outlined in the Operating Agreement, a document that details the company’s mode of doing business.
- Corporations pay federal income tax on the company’s profits, and shareholders also pay income tax on any dividends received, a system that is sometimes referred to as double taxation. Smaller corporations with fewer than 100 shareholders and who meet certain requirements may opt to be taxed as an “S-Corporation,” where profits pass through to shareholders’ individual tax returns and the corporation itself does not pay federal income tax.
- LLC members report profits and losses and pay taxes on business income through their personal tax returns. Unlike corporate shareholders, LLC members may also be required to pay self-employment taxes. If there is more than one member, an LLC may also choose to be taxed as a C-corporation or an S-corporation.
- Corporations are required to have a board of directors who set policies and oversee business operations. The corporation’s daily affairs are managed by its officers, and not by a single owner. Bylaws spell out the rights and responsibilities of the corporation’s directors, officers and shareholders.
- An LLC has more flexibility in its management structure. The company can be managed by its members or by a group of managers, with investors taking a silent role. Member-managed LLCs are often managed and operated by the owners themselves, who are often heavily involved in the company’s day-to-day affairs.
Record Keeping and Reporting
- In most states, corporations are required to hold annual shareholder meetings and they must give notice of those meetings. Many states require corporations to file annual reports for which they may have to pay a fee.
- The rules are more relaxed for LLCs, who have fewer and less formal requirements for record keeping, reporting and doing business. In many states, LLCs are not required to hold meetings or file annual reports.
LLC or INC: Which is Right for You?
In the case of both LLCs and corporations, the business entities are legally considered to be separate from their owners. While both entities share key features, there are differences in ownership, operation and taxation. Before establishing your business entity, you should carefully consider the pros and cons of LLC vs INC.
Not sure which business entity is right for you? At Windsor, our friendly staff is always happy to offer guidance. Contact the professional team at Windsor, and let us help you get your business up and running, with the legal structure that is best for you.