LLC vs Inc Pros & Cons: What’s the Difference & Which is Best?

How you choose to establish your business will have a major effect on every aspect of your company. Many businesses have a three-letter abbreviation at the end of their official legal name, either LLC or Inc. These letters show what type of legal entity it is.

Comparing an LLC vs Inc can help you understand the pros and cons of each type of business entity. 

In this article, you can explore the major similarities and differences between a limited liability company (LLC) and a corporation (Inc.), including the effect on management structure, how profit and loss distributions are handled, and how you pay taxes to the IRS.

LLC vs Inc: What's the difference between LLC and incorporated?

If you own a small business, you may consider forming a limited liability company (LLC) or a corporation (Inc.). Both are business entities formed through official state filings and both protect their owners from personal liability for their business. However, when comparing an Inc vs LLC, there are differences in the way they are taxed, managed, and owned.

You need to understand the differences between the two business structures so you can make the right choice for your company.

The pros and cons of LLC vs Inc

Each type of legal business designation has its own benefits and drawbacks. The differences between LLC and Inc can help you decide which is the best fit for you as a business owner.

Incorporated vs LLC Taxation

While both an LLC and corporation protect the personal assets of its members and shareholders, there are significant differences in the way they are taxed.

Corporations are defined as either a C corporation or an S corporation. C corps pay taxes on their corporate profits through corporate income tax to the IRS, while shareholders also pay taxes on their personal dividends. Because there are two types of taxes for C corporations, this is often referred to as double taxation.

Corporations that have 100 or fewer shareholders may qualify as an S corporation and avoid double taxation. An S corporation only pays taxes through the shareholders' personal income tax returns. If you live in Florida, you can compare a Florida S Corp vs LLC for specific state requirements.

LLCs are more flexible in their tax structure. A single-member LLC is taxed as a sole proprietorship, while an LLC with multiple members is taxed as a partnership. For tax purposes, LLC members pay taxes through their personal tax returns including self-employment taxes.

LLC taxation advantages and disadvantages

Pros

• Tax flexibility
• Members decide how they want to be taxed
• Protects personal assets

Cons

• Members must pay self-employment tax
• Potential tax confusion for LLCs that operate in multiple states

Inc taxation advantages and disadvantages

Pros

• Businesses can choose between S and C corporation status
• Shareholders may be eligible for tax-free dividends
• Greater liability protection

Cons

• Potential double taxation
• More cumbersome taxation recordkeeping

LLC vs Corporation Management

Corporations have a long established history, while LLCs statutes weren't approved in all 50 states until 1996. Corporations are required to have a board of directors that creates bylaws to oversee the business. In addition, every corporation must hold an annual shareholder meeting each year. Many states also require corporations to file annual reports, which may come with state fees.

Corporate officers manage the day-to-day affairs of a corporation. Depending on the size of a corporation, shareholders or stockholders may also be officers. In larger corporations, shareholders are less likely to be involved in daily operations.

LLCs are a newer option for businesses and are designed to offer flexibility in the way they are managed. An LLC is typically run by a group of managers or its members through an LLC operating agreement. The owners of an LLC are called members and typically run the business themselves. A manager-managed LLC may have investors with an ownership interest. However, the investors usually do not have an active role in the day-to-day operations.

Ownership of an LLC is defined by the operating agreement. In certain cases, if one or more of those members dies or wants to sell their portion, this could trigger an automatic dissolution. It is typically more difficult to transfer ownership of an LLC.

Most states require both LLCs and corporations to appoint a registered agent that will file official state documents and keep up with other official duties.

LLC management advantages and disadvantages

Pros

• More flexibility
• Ideal for small businesses
• Fewer formal requirements for business management

Cons

• Certain events can trigger automatic dissolution
• Harder to transfer ownership

Inc management advantages and disadvantages

Pros

• Well-established business structure
• Easier to transfer ownership

Cons

• Required annual meetings
• May need to file annual reports

LLC or Inc Ownership for Small Business?

If you run a small business or startup, your needs are dramatically different than those of larger, well-established businesses. For a small business, which is better, an LLC or Inc? You need to closely examine the advantages of an LLC compared to those of a corporation. 

Corporations typically manage ownership by issuing shares of stock. The owners of those shares are called shareholders or stockholders. Ownership is easily transferred from one owner to another. A corporation is an ideal choice for businesses that plan on having outside investors or offering public stock options.

Establishing a corporation requires legal filings and state fees. In addition, there may be other ongoing fees for legal expenses and accounting paperwork.

Forming an LLC requires Articles of Organization. The owners of an LLC are referred to as members. Each member owns a specific percentage of the company, which can be called a “membership interest.” LLC foreign ownership is also an option. Transferring membership in an LLC is usually more difficult than transferring shares in a corporation.

Both LLCs and Incs give small business owners the distinct advantage of separating their personal liability from that of their business. For example, if someone sues your business, any liability will come from business holdings instead of your individual assets.

LLC Ownership Advantages and Disadvantages

Pros

• Each owner has a membership interest
• More personal control for smaller businesses

Cons

• Some states charge more fees for setting up an LLC
• Profits subject to self-employment taxes

Inc Ownership Advantages and Disadvantages

Pros

• Easier to transfer ownership
• Enhances business credibility

Cons

• Shareholders have stronger control
• Ongoing fees

Incoporated vs LLC Formation

There are differences in the way corporations and LLCs are formed. In general, in most states it is easier to form an LLC. However, the state fees are usually higher for the initial LLC formation. LLCs fall under the jurisdiction of state laws, so the exact process will vary from state to state. Most state require businesses to file articles of organization with the Secretary of State. You may also have to file a public notice.

The formation of corporations also varies among states. In general, you will need to do the following:

1. Choose a business name
2. Appoint directors
3. File your articles of incorporation and pay fees
4. Write your corporate bylaws
5. Create a shareholders' agreement
6. Host the initial board of directors meeting
7. Issue shares
8. Obtain any necessary permits or licenses
9. Register with any state, local, and federal tax agencies

LLC Formation Advantages and Disadvantates

Pros

• Simple process with few steps
• More flexibility with formation process

Cons

• Higher fees associated with initial LLC formation
• Harder to raise capital because it does not issue stock

Corporation Formation Advantages and Disadvantages

Pros

• Well-defined formation process
• Stock options make it easier to raise needed capital

Cons

• Formation process is long and complex
• More parties involved in incorporation process

Which Is Better, LLC or Incorporation?

This guide is meant to help you answer the question, “Is it better to incorporate or LLC for your small business?” You should consider all the factors that go into a business structure such as tax rates, ownership control, and management setups before making your final decision.

With so many things to consider and having your business on the line, you might want to get professional legal help. The attorneys at Cueto Law Group offer an extensive range of legal counsel to businesses, entrepreneurs, and corporations, including working through a Florida LLC operating agreement.

Need some help choosing the right business entity classification for your company? Contact the Cueto Law Group today.

FAQs on LLC and Inc differences