When you’re first setting up your business, the right structure makes a big difference. You need to be protected and you need to choose the structure providing the best benefits for your situation.
Incorporation makes quite a bit of sense for small business owners, but choosing the right type of incorporation can be tricky. It’s important to look at LLC vs Inc before making your final decision. Here’s a closer look at both.
What is an LLC?
A Limited Liability Company (LLC) is the least complex structure when it comes to a business. It’s very flexible and allows you to use pass-through taxation, while providing legal protection for personal assets. It also helps your business look more legit than other businesses not using any type of incorporation.
What does Inc. mean?
Corporations (Incorporated businesses = Inc.) come in many different forms including C Corporation, S Corporation, Professional Corporation and Nonprofit Corporation. Each is a bit different and fits with different types of businesses.
- C Corporation – The most common choice for corporation in the US, C Corporation provides the ability to grow without limits through the sale of stocks. There is no limit to the number of shareholders, either.
- S Corporation – A bit of a lighter version of C Corporation an S Corporation provides the ability to offer investment opportunities with limited liability protection. However, S Corporations only file taxes yearly and they don’t have to deal with double taxation.
- Professional Corporation – Used mainly for professional partnerships, a PC or Professional Corporation structure allows for protection of personal assets against lawsuits. This structure is most widely used for lawyers, medical professionals, accounting, engineering and architecture firms.
- Nonprofit Corporation – A nonprofit corporation is pretty self-explanatory. If you’re business is mainly involved in religious, educational, scientific or charitable endeavors, this is the most likely structure you will use.
Each type of structure provides benefits for certain types of businesses, depending on their specific needs.
Advantages of LLC vs Inc.
Gaining the right advantages from the proper business structure is very important. If you choose the wrong structure, you may end up with issues in the future when it comes to protecting your personal assets, filing taxes and more. Here’s a quick look at some of the benefits of LLC vs Inc.
Limited Liability Company
The main advantage of the LLC business structure is the legal protection it provides for the business owners. Owners gain limited liability when it comes to business obligations and debts. If a lawsuit is filed, their personal assets are protected.
In addition, LLCs allow for pass-through taxation. This means, the business doesn’t have to file a tax return. Instead, the owners will report their share of the profit or loss on their individual tax returns, which means they avoid double taxation.
LLCs also don’t require you to be a U.S. citizen or permanent resident. Your business will also gain enhanced credibility with suppliers, lenders and partners.
C Corporations provides a number of benefits. Directors, shareholders, officer and employees are all protected with limited liability. This type of incorporation also allows for perpetual existence, even with owners leaving the company.
Growth potential with a C Corporation is unlimited with the ability to sell stocks and no limit to how many shareholders the company can have. However, if the company reaches 500 shareholders and $10 million in assets, it will need to register with the SEC. This type of incorporation also offers tax advantages with the ability to enjoy tax-deductible expenses.
S Corporations provide many of the same benefits as C Corporations, but not quite all of the same benefits. The limited liability for directors, shareholders, employees and officers is the same, but the S Corporation can use pass-through taxation and file just once per year. C Corporations must file taxes quarterly.
With the S Corporation structure the company can offer investment opportunities and sell stock. They also gain the benefit of perpetual existence, even if an owner passes away or leaves the company.
While some benefits come from forming a Professional Corporation, they are limited to specific types of businesses. Forming a PC means the owners will most likely be requires to be licensed in the same profession. This type of incorporation is taxed like a C Corporation. A Professional Corporation does help to protect the partners from malpractice when it comes to the other owners within the company.
A Nonprofit Corporation provides many benefits including limited liability protection for officers and directors, perpetual existence if a director passes away or leaves the business and eligibility for private and public grants.
Nonprofit Corporations also enjoy enhanced credibility, tax-deductible donations, reduced postage rates and tax-exemption status. Some will also become exempt from certain property taxes.
Disadvantages of LLC vs Inc.
Each business structure comes with benefits, but they also come with disadvantages. It’s important to understand both before you make your decision between the LLC structure or one of the Inc. structures.
Limited Liability Company
The main disadvantage of forming a Limited Liability Company is the limited growth potential. You won’t be able to issues stock shares for investors with this structure. It also doesn’t provide much uniformity as LLCs are different in each state.
With the LLC structure small businesses may be subject to the self-employment tax. If you convert an existing business to an LLC, you may suffer from tax recognition on appreciated assets, as well.
C Corporations, while very common, do come with disadvantages. The biggest one is the possibility of double taxation. This type of incorporation is also expensive to start and has to comply with many regulations. C Corporations also don’t gain the ability to deduct corporate losses on taxes.
S Corporations cannot be formed if you’re not a US citizen and permanent resident. They also only allow for up to 100 shareholders and must meet tax qualification obligations. This type of incorporation is also scrutinized closely by the IRS and can be expensive to form and maintain.
Professional Corporations are not recognized in all states and some may have very strict requirements for this type of incorporation. You must provide proof of licensing in most states and many industry-specific regulations may apply to your company name.
The biggest disadvantage of a Professional Corporation is the lack of protection for the partners from malpractice and other lawsuits. They may also end up with double taxation.
Nonprofit Corporations don’t come with many disadvantages. However, they can be a bit difficult to form and the process can be long. Often, it’s necessary to hire a professional to help set up a Nonprofit Corporation.
The Verdict for LLC vs Inc.
There is no clear winner as each different structure provides benefits and disadvantages. LLCs are commonly used by small to medium-sized businesses, while the different Incorporated structures are used by businesses looking to attract investors.
Choosing the right structure for your business is very important for both the business and the individual. If you’re not sure which is right for you, make sure to speak with a professional in this area before making your final decision.