If you're considering starting a company and want to choose between an LLC and Inc. (corporation), here is what you should know about the differences. A limited liability company (denoted by L.L.C. or LLC) is a business structure that provides limited liability to its owners. This means the business is a separate legal entity and the owners ("members" of an LLC) are not legally liable for some acts and debts of the LLC. Inc. is short for Incorporated and denotes a C or S corporation. A corporation also offers liability protection but differs from an LLC in terms of ownership structure and rules, regulations they have to follow, management overhead and tax treatment of profits.
Contents: Inc. vs LLC
LLCs are organized with a document called the "articles of organization", or "the rules of organization" specified publicly by the state; additionally, it is common to have an "operating agreement" privately specified by the members. The operating agreement is a contract among the members of an LLC governing the membership, management, operation and distribution of income of the company.
For an Inc., the Articles of Incorporation (also called a Charter, Certificate of Incorporation or Letters Patent) are filed, listing the purpose of the corporation, its principal place of business and the number and type of shares of stock. A registration fee is due which will usually be between $25 and $1,000, depending on the state. A corporate name is generally made up of 3 parts: "Distinctive element", "Descriptive element", and a legal ending. All corporations must have a distinctive element and (in most filing jurisdictions) a legal ending to their names. Some corporations choose not to have a descriptive element.
In the name "ABC Exports Inc." the word "ABC" is the distinctive element; the word "Exports" is the descriptive element; and the "Inc." is the legal ending. The legal ending indicates that it is in fact a legal corporation and not just a business registration or partnership. Usually there are also Corporate Bylaws which must be filed with the state. These will outline a number of important corporate housekeeping details such as when annual shareholder meetings will be held, who can vote and the manner in which shareholders will be notified if there is need for an additional "special" meeting.
edit Management Structure
The structure of the Inc. is as follows:
- Shareholders own the stock of the corporation.
- Shareholders elect Directors (known as the "Board of Directors").
- Directors appoint Officers (President, Secretary, Treasurer, etc.).
- Officers run the company (day-to-day operations).
The owners of an LLC are called "Members" instead of "Shareholders". Managing members are the individuals who are responsible for the maintenance, administration and management of the affairs of an LLC. In most states, the managers serve a particular term and report to and serve at the discretion of the members. This may be called a Two Tiered Management structure for LLC's.
In a LLC, Limited liability means that the owners of the LLC, called "members," are protected from some liability for acts and debts of the LLC, but are still responsible for any debts beyond the fiscal capacity of the entity. LLCs in most states are treated as entities separate from their members, whereas in other jurisdictions case law has developed deciding LLCs are not considered to have separate juridical standing from their members.
In a corporation, however, stockholders, directors and officers typically are not liable for their company's debts and obligations. They are limited in liability to the amount they have invested in the corporation. Corporations are separate entities from their shareholders.
Incorporations and Limited Liability Companies (LLCs) may also hold personal assets like houses, cars or boats. If one is personally involved in a lawsuit or bankruptcy, these assets may be protected. A creditor of the owner of a corporation or LLC cannot seize the assets of the company; however, they can seize their ownership shares in the corporation, as that is considered a personal asset.
In the United States, corporations are taxed at a lower rate than individuals. Also, they can own shares in other corporations and receive corporate dividends 80% tax-free. There are no limits on the amount of losses a corporation may carry forward to subsequent tax years. However, a corporation business structure suffers from double taxation i.e. the corporation is taxed on the profits it generates. And when it distributes these profits to its owners (share holders), these distributions are considered taxable income for each share holder.
An LLC can elect to be taxed as a sole proprietor, partnership, S corporation or C corporation, providing much flexibility. There is no double taxation for LLC owners (members) unless they want to be taxed as a Corporation. LLC members can choose pass through taxation by which the LLC itself does not owe income tax on the profits; rather, these profits are distributed to individual members who then report them as income on their tax return. Thus double taxation is avoided.
A Corporation can be incorporated with a single person over the age of 18 years also. A LLC can be started by 1-5 people generally depending on the state is is set up in.