This is a guide to the difference between LLC and Inc. Learn what is the difference between LLC and Inc in this comprehensive guide.
A business’s name may have an abbreviation after it, such as LLC or Inc. In this guide, I will find out what these abbreviations mean and how an LLC is different from a corporation.
Note: The abbreviation Inc. for corporations comes from the Latin word for company.
Difference between LLC and Inc: Comprehensive guide
What is Incorporation?
Incorporating your business is a formal declaration of who you are and what your business stands for. It’s also a legal recognition of who you are since it establishes a corporate identity separate from the founders. Basically, as soon as you incorporate, you’re a company.
There are usually two categories your new company structure assumes:
- A Limited Liability Company (LLC)
- A corporation (corp)
What is a Limited Liability Company (LLC)?
An LLC stands for Limited Liability Company, a legal structure that combines the tax efficiencies of partnerships and corporations. Unlike the corporate form of business, however, LLCs operate like a partnership.
The limited liability (the “LL” in LLC) is what protects personal assets against any liabilities of a business. This form of business organization was developed in Wyoming and has since been adopted by all states except Hawaii, which never formally prohibited its use.
The word “limited” in the name refers to the liability protection afforded to its owners. In other words, if your company is sued or becomes liable for damages, you are only on the hook for the amount that you have invested in the company.
For example, if you own 25% of a limited liability company and you are sued for $10 million, you will only be responsible for paying $2.5 million out of pocket.
Related: How to Form an LLC in Colorado
What is a Difference Between LLC and Inc?
Let’s come to the main point of this guide, What is the difference between LLC and Inc.
Both LLC and Inc. are business types that are recognized as legal entities and protect their owners, or members, from personal liability.
But they’re different in the way they’re owned, managed, taxed, and required to maintain reports and records.
LLC vs. Inc: Ownership
Owners of either type of business can be individuals or other companies. An LLC can have any number of owners, while an Inc. can have no more than 100. However, an individual who wants to create a business should generally choose an LLC because it offers greater flexibility in managing ownership interests—an LLC can have as many members as you want and can change some aspects of its structure without dissolving.
LLC vs. Inc: Management structure
In both cases, the owners manage the entity by appointing managers to oversee daily operations. An LLC is managed by its members directly or through a manager or managers who may be members or non-members. An Inc.’s board of directors manages its daily activities through officers such as a president, secretary, and treasurer whose titles depend on the type of company (for example, a C corporation has a chief executive officer).
LLC vs. Inc: Taxation
The main difference between an LLC and a corporation is that an LLC is considered a “pass-through” entity for tax purposes, while a corporation is considered a “separate taxable entity.” That means that income earned by your LLC passes through the company to be taxed on your personal income. On the other hand, Corporations are required by law to pay income tax on their profits.
LLC vs. Inc: Reporting and Recordkeeping
State laws governing corporations and LLCs require that the entity is in good standing to maintain its limited liability protection. This means that annual reports and/or franchise taxes are due based on the business’ entity type and the state in which it is formed. Both corporations and LLCs have annual reporting requirements, but the specific rules governing each vary from state to state.
LLCs are typically required to submit an annual report or “certificate of existence” with their home state. This certificate must be filed each year with the Secretary of State’s office where the LLC was originally formed. The filing fee is $50-$200, depending on what state you’re doing business in.
While Corporations have to also file a report, called a “franchise tax” or “annual corporate franchise tax,” with their home state. However, this report is due by June 15 of each year, instead of at any given time during the first half of the year. The amount of your franchise tax will be determined by your corporation’s net worth as well as its location within the state where it was formed.
In this complete guide, I told you What is the difference between LLC and Inc and I fully explained it. I hope you find this guide helpful.
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