Difference Between LLC and Inc

By Cindy DeRuyter, J.D.

Difference Between LLC and Inc

By Cindy DeRuyter, J.D.

When you start a new business, you need to decide whether to create a limited liability company (LLC), a corporation, or another entity. Corporations are also abbreviated and referred to as 'inc.', which is short for 'incorporated.' While there are some similarities between LLCs and corporations, there are also several key differences including ownership structure, the formalities the business must observe, and taxation. If you are considering establishing a new business or changing the form of an existing business, it is helpful to understand and evaluate these factors.

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Ownership Structure

The core difference between corporations and LLCs has to do with the structure of each type of business entity. Corporations, whether publicly traded or privately held, issue shares of stock representing ownership in the business. In contrast, LLCs are not shareholder-owned. Instead, people or companies investing in an LLC are called members. The LLC's operating agreement serves to document each member's financial and voting rights. Those rights can differ from member to member.

Business Formalities

Another key difference lies in the business formalities each type of entity must observe. Corporations must hold annual shareholder meetings, and the company must document those meetings. LLCs do not need to hold annual meetings. However, LLC members should still ensure that they adhere to any requirements defined in the company's operating agreement, as well as those specified under state law. In addition, the LLC must appropriately document all actions its members take. Similarly, LLC members should maintain a separation between their personal assets and their business assets. Failure to do so puts members at risk of losing the liability protection the LLC structure provides.

Taxation

There are also key differences in the tax treatment of corporations and LLCs. The default taxation for an LLC is to treat income as "pass-through" business income. This means that the LLC is not taxed at the business level. Single-member LLCs are taxed as sole proprietorships, so the member reports income and expenses for the business on his or her personal income tax return. By default, LLCs with two or more members are taxed as partnerships, so each individual member is responsible for taxes on his or her proportionate share of income and expenses.

With respect to taxes, corporations differ, depending upon type. C corporations are separate legal entities, so income is taxed at the corporate level and again at the individual shareholder level. S corporations, by contrast, allow pass-through business income. However, not every corporation meets S corporation requirements.

An LLC may elect to forego pass-through taxation and be taxed instead as a corporation. Even in this case, LLC members may still be responsible for paying self-employment taxes on income—something corporate shareholders do not have to pay.

State-Specific Differences and Requirements

Finally, it is important to understand that corporations and LLCs are both subject to the laws of the states in which they operate. Each state has its own process for establishing and maintaining business entities, and ignorance of the law is not a valid defense.

Research your state's requirements, processes, fees, and expectations fully before registering or converting an LLC or corporation.

LLCs might be a good choice for some businesses, while others may find forming a corporation makes more sense. The best choice for your business depends on your specific circumstances and goals. When in doubt, consult with a business law attorney and tax professional in your state.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.