LLC vs Inc
The most common decision for smaller start up companies is whether to form a LLC or corporation with a "s election". Both entities have many similarities such as limited liability protection of personal assets against lawsuits and debts. However, there are several differences, especially in regards to taxation. Although there is a lot of information regarding s-corporations and LLC's in general, there is very little available that breaks down the important differences.
The main differences between LLC and Inc
- Corporations issue stock and are owned via stock. An LLC does not issue stock. Like partnerships, an Limited Liability Company is simply owned by the members and/or the managers of the company.
- Corporations are required to hold annual meetings and to keep written minutes. An LLC does not have this requirement, resulting in less official paperwork.
- An Incorporation is a taxable entity, and they must pay taxes on their profits at the corporate tax rate. An LLC, like a sole proprietor, partnership and S Corporation, is a "pass-through" tax entity. This means that the profit or loss generated by the business is reflected on the personal income tax return of the owners, thus avoiding the double taxation of paying first corporate tax on profits and then personal income tax on distributions of profits.
- Limited liability companies are a relatively new type of business entity that combines the personal liability protection of a corporation with the tax benefits and simplicity of a partnership. The following section details the main advantages and disadvantages of corporations versus LLCs.
- Corporation profits are not subject to Social Security and Medicare taxes.Like a sole proprietorship or a partnership, the salaries and profits of an LLC are subject to self-employment taxes, currently equal to a combined 15.3%. With a corporation, only salaries are subject to such taxes.
- Corporations garner greater acceptance Since limited liability companies are still relatively new, not everyone is familiar with them. In some cases, banks or vendors may be reluctant to extend credit to limited liability companies. Some states restrict the type of business an LLC may conduct.
- LLCs have no ownership restrictions but S corporations cannot have more than 100 stockholders. Each stockholder must be an individual who is a U.S. resident or citizen. Also, it is difficult to place shares of an S corporation into a living trust. These restrictions do not apply to LLCs.
- LLCs have fewer corporate formalities but Corporations must hold regular meetings of the board of directors and shareholders and keep written corporate minutes. Members and managers of an LLC need not hold regular meetings, which reduce complications and paperwork.