People often confuse LLCs (limited liability companies) with corporations (Inc.). They are, at first glance, similar, yet very legally different. The two business structures do share one very important feature -- limited liability for owners. However, many other components are different. While one choice is not "better" than the other, one option may be more appropriate than the other in certain circumstances. An Inc is seldom an inappropriate choice, but can be more expensive or tedious to maintain than an LLC, from a paperwork perspective.
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LLC and Inc. Similarities
The most significant similarity shared by both LLCs and corporations is the personal asset protection offered. Personal asset -- homes, autos and bank accounts -- protection from company creditor attack is the most important similarity between LLCs and corporations. LLCs may also choose to be taxed as corporations, instead of distributing their profits directly to owners to be included in their personal income for tax purposes.
LLC and Inc. Ownership Differences
Ownership differences are wider than the similarities. LLCs are restricted to 100 stockholders or less, while corporations are limited only by the number of shares they authorize and issue. Should an Inc. go "public," offering their shares for sale on global stock markets, anyone is eligible to purchase, hold or sell these stocks. All stockholders in an LLC must be U.S. citizens or legal resident aliens. If you plan to attract many stockholders, an Inc. may be the best option. Should you intend to keep your ownership group small, an LLC will work for you.
Tax considerations are often critical of your choice of creating an LLC or an Inc. Tax rates, which change depending on the whim of Congress, are usually higher for an Inc. Owners of an Inc have two taxation options: They can be taxed as a standard (C) corporation or they can select Sub-chapter S treatment (S corp), which make their company a "pass through" entity, with all profits allocated to stockholders to be included in their personal income. LLCs have have three choices for taxation: They can choose to be taxed as a partnership, sole propietorship or a corporation. All LLCs are "pass through" organizations, so owners will receive profits as personal income, unless they specifically choose corporate taxation.
How to Choose an LLC or Inc,
LLCs are structured for single owners, partnerships and smaller organizations. Corporations lend themselves to all companies, large and small. If you have a smaller company, want to avoid the many paperwork requirements of an Inc., and still enjoy the limited liability of corporate stockholders, an LLC is the best option. Should you believe your business will grow substantially, envision more than 100 stockholders in the future or hope to take your company "public" -- listed on a stock exchange with shares available for purchase worldwide -- an Inc. is your best choice.
References & Resources
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