LLC vs Inc: Which is Best?

by ExpertEntrepreneur

Trying to decide between forming an LLC or an Inc? Here's the major differences between the two and some tips to help you decide.

While coming up with a one-of-a-kind business idea and obtaining financing is arguably the most difficult part of starting your own business, choosing the right business structure is equally important. Business owners have more options than ever in terms of the types of businesses they can choose from, including S corporation, partnerships, sole proprietorship and LLC. When you're trying to choose between LLC vs Inc, here is what you need to keep in mind.


What Does Inc Mean?

Inc stands for incorporated and it includes both C corporations and S corporations. This type of company is designed for large entities and, unlike an LLC, the shareholders are the owners and management includes shareholders, directors and officers. The major downside of corporations is the double taxation, which means income is first taxed at the corporate level and then again after it's distributed to shareholders in the form of dividends. You have no choice in the taxation structure you receive and shareholder meetings must be held regularly according to the law. "Inc." will be added to your entity name and a great deal of paperwork is required every year. The major advantage to a corporation is limited liability, which means owners are not held personally liable for the debts and obligations of the business and their personal assets are protected, as long as the corporation remains compliant with applicable laws.

What is an LLC?

LLC stands for limited liability company and this type of entity is designed for small businesses. A growing number of business owners are choosing to form an LLC because of the flexibility in terms of management, taxation, ownership and operations. LLCs are owned by the members, and there may be one or more members. Only members and managing members operate the company, as opposed to shareholders, directors and officers, and LLCs offer the same limited liability protection as a corporation. One of the biggest advantages to forming an LLC is profits and losses as passed directly to the members and there is no double taxation. LLCs may opt to be taxed as an SMLLC (single member limited liability company), a partnership or an S or C corporation. There is also minimal paperwork required.

LLC vs Inc: Which is Best for Me?

There is no one option that's best for everyone and you'll need to carefully consider the pros and cons before making a decision. LLCs are gaining popularity as they're very easy and cheap to set up and still create a separate legal entity with the ability to define who the members are are what percentage they own. With no regulatory rules to deal with or expensive disclosures, they've also become a good choice for many small businesses. The members are also taxed in ratio to their ownership and an LLC is not taxed as a corporation (unless members choose to), which is a major advantage.

The downside to LLCs is most professional investors either prefer or require you have a C corporation as tax laws governing nonprofits make it difficult to invest in an LLC. Investors also want to see that you can give stock options to employees, which is definitely easier by forming an Inc.

If you're having trouble deciding which option is best for you, consider working with a corporation services company like USA Corporate Services Inc. to decide which option will work best for your business.

Updated: 04/08/2013, ExpertEntrepreneur
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