LLC vs. Inc.: What Is the Difference Between Them?

Key differences between LLCs and corporations 

The biggest differences between an LLC and corporations are the formation process, management/ownership structure, and taxation methods. Recognizing the key differences between the two can aid in making an informed decision about your business structure. 

Formation and legal requirements

The formation process for LLCs and corporations involves distinct steps and legal requirements. To form an LLC, one must file the articles of organization with the respective Secretary of State (SOS). In some cases, you may have to draft an operating agreement that outlines the management and ownership structure of the LLC or issue a public notice. While starting with an LLC operating agreement template can help you organize your thoughts and key decisions, a professional operating agreement service can best address complex business structures or unique arrangements. Offload the paperwork headache to a business formation company like LegalZoom. Our directory of business lawyers can simplify the LLC registration process for you. 

Forming a corporation requires filing articles of incorporation, selecting a board of directors, and submitting corporate bylaws. 

As part of their formation paperwork, both entities need to appoint a registered agent, select an available and legally appropriate business name, and pay the stipulated fees. Your state's Secretary of State website is the best resource for understanding your state's specific formation requirements.

While both business entities are subject to compliance requirements like filing annual reports and renewing appropriate licenses and permits, corporations typically face more stringent legal requirements and record-keeping obligations. For instance, transfer of corporate stocks may require additional regulatory compliance, and their financial statements may undergo more audits.

Management and ownership 

The management and ownership structures also differ between LLCs and corporations.

Here’s how LLCs are owned and managed. 

• Ownership. LLCs have members with ownership interests in the company. These members can be domestic or foreign individuals, corporations, partnerships, or trusts. An operating agreement is useful to define membership interests, outline ownership transfer process, and specify what happens when a member leaves. 
• Management. LLCs offer a more flexible management structure, allowing members to either manage the business themselves or appoint designated managers. This adaptability can be advantageous for small businesses and startups that require more control over their day-to-day operations.

Corporations, on the other hand, are owned and managed differently. 

• Ownership. Corporations have shareholders who own stock in the corporation and generally offer more straightforward methods for transferring shares and changing ownership. If a shareholder sells their stake, the corporation doesn’t dissolve. The ability to transfer ownership through the sale of shares also simplifies the process of business succession and attracting new investors.
• Management. Corporations follow a more rigid structure, with shareholders electing a board of directors responsible for overseeing the company's affairs.

Taxation

When deciding between an LLC and a corporation, taxation is a key factor to consider because it impacts your bookkeeping and bottom line. 

From a tax standpoint, LLCs: 

• Are not viewed as an independent entity by the Internal Revenue Service (IRS).
• Benefit from pass-through taxation.
• Have the flexibility to choose their tax filing status.
• Allow profits and losses to flow through to the individual members' tax returns, avoiding double taxation.
• Can be particularly advantageous for small businesses and startups seeking to minimize their tax burden.
• Members pay income and self-employment taxes, which is currently at 15.3%.

Some LLCs prefer to be taxed as C corporations because then only salaries paid to owners and employers are subject to self-employment taxes. Other earnings are treated as dividends and are exempt from Self-Employment Contributions Act (SECA) Tax.

On the other hand, a corporation: 

• Is viewed as a separate taxable entity by the IRS.
• Has to pay taxes on profits and dividends. The current corporate taxation rate is 21%.
• Have certain federal deductions available only to them, such as carrying back net operating losses (NOLs) for two years.
• Requires shareholders to pay personal income taxes.
• Can elect S corp status to enable pass-through taxation and avoid double taxation.

LLCs and corporations, with only one class of stock and under 100 shareholders, can opt to elect an S corp tax filing status.

S corporations: 

• Have pass-through taxation and are taxed only at personal income level
• Don’t have to pay taxes on dividends if it doesn't exceed stock value
• Are exempt from federal corporate income tax 
• Have to pay employment taxes only on salaries paid to owners and employees

Reporting and record keeping

Both LLCs and corporations are governed by the laws of the state where they are formed. Each state has its own set of rules about the records businesses must keep and the regular reports they must file with the state.

Corporations are usually required to hold an annual shareholder meeting, and they must give notice of that annual meeting in the way described in the bylaws. Certain actions must be confirmed in resolutions that are kept in corporate minute books. Most states require corporations to file annual reports and pay an annual fee or franchise tax.

Compared to how corporations operate, LLCs have more flexibility in the way they do business. For example, LLCs typically don't have to hold member meetings under state law, but the LLC's operating agreement may require them. LLCs often have fewer record-keeping requirements than corporations. But like corporations, LLCs must file an annual report form accompanied by an annual report fee and/or franchise taxes in many states.