The basic question that arises before the entrepreneurs when starting a new business venture is, which business type to choose? The business structure is not just a status, rather all the legal formalities, before and after the business is set up, depends on the type itself. So, along with discovering an innovative idea for launching a business, the businessperson should also make plans for the structure, they want for their business, to make it successful.
While making a choice between business types, most business owners get confused between LLC or Inc. The former combines two forms of business, i.e. partnership and corporation. On the other hand, the latter means Incorporated, i.e. which represents the form of corporation, such as S corp or C corp. Let’s take a glance at the article provided to you to know the difference between LLC and Inc.
Content: LLC Vs Inc.
|Basis for Comparison||LLC||Inc.|
|Meaning||A Limited Liability Company or LLC is a private company, that merges the features of a corporation and a partnership firm.||Inc. is an abbreviation for Incorporated, used as a suffix in the name of corporations, indicating a business entity registered under law.|
|Legal formalities and record keeping||Less||Comparatively more|
|Taxation||Pass-through taxation||Double taxation|
|Annual General Meeting||Optional||Compulsory|
|Annual report||Not necessary||Must be filed with the appropriate authority.|
|Approprite for||Small entities||Large entities|
Definition of LLC
LLC expands to Limited Liability Company, is a privately held company, with minimal legal formalities. It is a unique form of business which combines the features of partnership and corporation, i.e. flow-through income taxation and limited liability respectively.
The business form can have an unlimited number of owners. The profits earned or losses suffered are reported by the business owners on their individual tax return. It provides legal protection for the personal property of the owners, from business debts and obligations. LLC do not have to follow a lot of legal requirement, such as organise meetings, maintain minutes, record resolutions taken by the company, etc.
An LLC cannot issue shares to the public, so as to raise funds from the market. Further, the rules in connection with the LLC may differ from country to country, due to the absence of uniformity. Self-employment tax should be paid on the income of the LLC.
Definition of Inc.
Inc. expands to Incorporation, which implies the legal process of forming a corporation. Generally, the term Inc. is added at the end of the name by the corporations which are incorporated. Corporation is an artificial person, a separate legal entity which is treated independently of its members, having its own rights and obligations, limited liability, perpetual succession, holds property in its own name.
Organisations such as for-profit, non-profit, sports club, public or private are operated around the world as corporations. As per US law, for tax purposes, a corporation can be S Corp or C Corp.
The formation of an Inc. requires submission of articles/certificate of incorporation, which highlights various matters such as objective, location, number & type of stock. The name of the corporation is divided into three parts, i.e. distinctive element, descriptive element and a legal ending, where the distinctive element and legal ending are a must for all the corporations.
Key Differences Between LLC and Inc.
The difference between LLC and Inc. can be drawn clearly on the following grounds:
- A private company, which merges the features of a corporation and a partnership firm, is called LLC or Limited Liability Company. Inc. is an acronym for Incorporated, used as a suffix in the name of corporations, denoting a business entity registered under the law.
- The owners of the LLC are the members, whereas shareholders are the ultimate owner of an Inc.
- An LLC is a privately held corporation, but an Inc. is a publicly traded corporation.
- LLC offer greater flexibility than Inc., i.e. there is no bar on the maximum number of members in an LLC, but an S Corp. can have only 100 members.
- The Inc. (Corporation) is subject to stringent legal formalities and record keeping. However, when it comes to LLC the legal formalities and record keeping is lenient.
- The best feature of LLC is pass through taxation, i.e. the income of the LLC is taxable in the hands of its owners after it is distributed to them. On the contrary, Inc. have to face double taxation, first at the corporate level and next at individual level, when the profit is distributed to shareholders as the dividend.
- The Annual General Meeting (AGM) should compulsorily be held by an Incorporated Corporation. As against this, the holding of an AGM is not required, for a Limited Liability Company.
- The annual reports of an Inc. should be submitted to the appropriate authority within the stipulated time. Unlike LLC, wherein the filing of annual reports, with appropriate authority is not necessary.
- For smaller entities, LLC is the best option to choose, because of fewer legalities and flexibility, while for large firms, Inc. is the right decision due to growth and profitability prospects.
- Limited liability.
- Perpetual Succession.
- Formation requires state-level registration.
- Both in C Corp. and LLC owners need not be US citizens or residents.
As every coin has two sides, so with LLC and Inc. In an LLC there is no ceiling on the number of members, the business income is pass through to the member’s personal tax return. However, it cannot issue stock to raise funds from the market. On the contrary, Inc. are authorised to make the public issue and the splitting of corporate income, lessens overall tax liability, but the cascading effect is seen in the taxation of such entities.
Therefore, both are separate legal entities, which share some common traits, but the distinction arises in the ways they are owned, operated and taxed. So, consider all the factors before you come up to any of these business structures.