You may have noticed that business names often end with an abbreviation such as LLC or inc. But what do those abbreviations mean? What is the difference between LLC and inc.? In fact, what is an LLC? The letters may seem confusing, but LLC and inc. are abbreviations for different kinds of business entities.
"LLC" stands for limited liability company. The abbreviations "inc." and "corp." indicate that a business is a corporation.
LLC vs. corporation ownership
Corporations issue shares of stock to their owners, who are called shareholders. Corporate shares are easy to transfer from one owner to another, and therefore a corporation can be a good choice for a business that anticipates having outside investors or making a public stock offering.
The owners of an LLC are called "members," and instead of shares, each member owns a designated percentage of the company, sometimes called a "membership interest."
Membership in an LLC may be more difficult to transfer than shares in a corporation. An LLC's operating agreement will typically specify whether and how membership interests can be transferred.
In some states, if a member leaves an LLC and the operating agreement does not specify otherwise, the LLC must be dissolved.
Difference between LLC and corporation taxation
Corporations can be taxed in one of two ways. By default, they are taxed as C corporations. They pay federal income tax on their corporate profits, and shareholders also pay tax on any dividends they receive. Since the dividend amounts are taxed at both the corporate and personal level, this is sometimes referred to as "double taxation."
Corporations that have 100 or fewer shareholders and meet other requirements can avoid double taxation by choosing to be taxed as S corporations. An S corporation doesn't pay corporate income tax, but the corporation's profits pass through to the shareholders' personal tax returns, and each shareholder pays tax on his or her share of the profits.
LLCs have an even more flexible tax structure. By default, a single-member LLC is taxed like a sole proprietorship and a multi-member LLC is taxed like a partnership. That means that the LLC's members report and pay tax on business income as part of their personal tax returns. LLC members-unlike corporate shareholders-may also be liable for self-employment taxes.
An LLC can also choose to be taxed as a C corporation or an S corporation.
Difference between LLC and inc. management
Corporations have been around for a long time, and they have a fairly standard and rigid management structure. Corporations must have a board of directors that sets policies and oversees the business.
A corporation's day-to-day affairs are managed by its officers. In a small corporation, one person may wear several hats, being a shareholder as well as an officer and director. In larger corporations, shareholders are less likely to be involved in running the business. The rights and responsibilities of the directors, officers and shareholders are spelled out in the corporation's bylaws.
LLCs are a newer concept, and they are designed to be more flexible in the way they are managed. An LLC can be managed by its members or by a group of managers. Typically, in a member-managed LLC, the owners are heavily involved in running the business, while a manager-managed LLC usually has investors who don't have an active role.
LLC and inc. reporting and recordkeeping
Both LLCs and corporations are governed by the laws of the state where they were formed. Each state has its own set of rules about what records businesses must keep and what sort of regular reports they must file with the state. In general, corporations are subject to more regulations and requirements than LLCs.
Corporations are usually required to hold a shareholder meeting every year, and they are required to give notice of those meetings. Certain actions must be confirmed in resolutions that are kept in corporate minute books. Many states require corporations to file annual reports, often accompanied by a fee.
LLCs have fewer and less formal requirements for the way they do business and they may be subject to more minimal record-keeping requirements. In many states, LLCs are not required to file annual reports.
Both LLCs and corporations are business entities separate from their owners. They share many features, but they're different in the way they're owned, operated and taxed. If you are forming a new business, you should carefully consider which type of business entity seems best for you.