If you’re reading this post, you are probably considering starting a company or want to elevate your sole proprietorship business to something recognizable.
You’re wondering which business entity to go for between Inc and LLC.
We’re here to help you out.
When starting a company, deciding your entity type is an important decision to make. This is because it will determine how you form, run, grow, and manage your business in the future.
While a Limited Liability Company (LLC) and Inc. (Corporation) are two of the most common legal business entities, they are slightly similar in some ways and have striking differences.
Furthermore, understanding their differences can be overwhelming, especially for individuals starting a business or forming a company for the first time.
In this Inc. vs LLC comparison guide, we will highlight the key differences and similarities between Inc vs. LLC to help you make an informed decision.
Let’s get started.
Inc. vs LLC: Definition
Inc. or corporation is a legal business entity that’s owned by shareholders and is completely separate from its owners and shareholders.
As a separate legal entity from its owners, an Inc. otherwise, the corporation can handle business operations independently.
For instance, it can hire employees, sign agreements with other companies, borrow money, etc.
On the other hand, an LLC or Limited Liability Company is a business entity owned by one or two members. In this case, the members could be sole proprietors, business partners, or self-employed people.
LLC. vs Inc: Similarities
Even though Inc. and LLC differ in several ways, the two business legal entities share some similarities, including:
- They are both separate and district from their owners
- The law requires the two to be operated within the state they were formed
- An LLC offers protection to its members, and a corporation to its shareholders
- Both can sell ownership of the company to investors to raise money
Another critical similarity between Inc. and LLC is that you must file for state articles and apply for an EIN when forming any of them.
Filing the paperwork when forming an LLC or Inc. can be challenging for beginners.
In that case, hiring a business formation company like LegalZoom can be helpful because it offers many perks, such as simplified applications for state and federal filings. You can read this review of LegalZoom by GovDocFiling to understand the company’s services.
Inc. vs LLC: Comparison Table
Here is a comparison table between an LLC and Inc.
| Inc. | LLC | |
| Ideal for | Large organizations | Small and medium-sized businesses with fewer shareholders |
| Management | Shareholders, a group of members, directors, etc. | Members who own the company |
| Taxation | Prone to double taxation | Single taxation is applied |
| Ownership | Owned by shareholders | Owned by members |
| Shares | Can issue shares | Cannot issue shares |
| Formation | Not easy to form
A lot of paperwork and legality is required to develop an Inc. |
Easier to establish
Less paperwork is needed |
| Stocks | Can issue stocks | Cannot issue stocks |
| Membership transfer | Membership can be easily transferred from one person to another | LLC membership cannot be easily transferred |
| Meetings | Regular meetings are conducted | No legal requirement for regular meetings |
| Perpetuity | Not affected by death or withdrawal of a shareholder(s) | Can be affected by the death or withdrawal of a member(s) |
Key Differences
Here are the key differences that set apart an Inc. from an LLC:
Formation
Forming an LLC and Inc. is similar but with some notable differences.
You must file Articles of Incorporation when forming a corporation (Inc.). However, you will file Articles of Organization with the state for an LLC.
For an Inc., you will also be required to designate shareholders and elect a board of directors to undertake management and hold regular meetings. This makes the formation process more complex and costly.
Ownership
An LLC is owned by members who hold membership interests (a certain percentage of the business). Membership interest can only be transferred with effort.
On the other hand, shareholders of a corporation(Inc.) own shares of stock that can be easily transferred from one shareholder to another.
This makes it a suitable option for businesses with outside investors or offering public stocks.
Taxation
For Inc., you can choose to be taxed as a C corporation or an S corporation.
A C corp is prone to double taxation. The company pays federal income tax on profits generated, and shareholders also pay tax from the dividends they get from the company.
To avoid double taxation, you can choose the S corp status, where the company is exempted from corporate income tax on profits.
It’s the shareholders who pay income taxes from the profits the corporation generates.
On the other hand, an LLC has a more flexible tax structure in that a single-member LLC pays tax as a sole proprietorship, whereas a multi-member LLC is taxed as a partnership.
Management
An Inc. is managed by a board of directors or officers who set policies and administer the company.
On the other hand, an LLC is managed by its members or a group of members/managers. In this case, the members oversee the day-to-day running of the business.
Reporting and Recordkeeping
While state laws govern an LLC and Inc., an Inc. must adhere to more regulations and requirements and an LLC.
For instance, shareholders of a corporation are required to hold yearly meetings and issue notices of the meetings.
Furthermore, shareholders are required to write corporate minutes and file annual reports at a certain fee.
On the other hand, a Limited Liability Company is subjected to minimal record-keeping requirements. In fact, in many states, there is no requirement to file annual reports.
Conclusion
Choosing between an Inc. vs LLC boils down to how you intend to run, manage, and grow your business.
They are separate legal business entities from their owners, with several similarities and critical differences.
This post will help you choose a suitable business entity for forming a company.
—
Author Bio:
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.