When starting a limited liability company (LLC), there is often confusion about whether an LLC is also incorporated.
Like incorporation, LLCs offer tax advantages and liability protection, however, they are not incorporated. Understanding the key distinctions and similarities between LLCs and corporations may aid in deciding what works as the best business structure for you.
What Business Structures Are Unincorporated and Incorporated?
You can structure your business as a sole proprietorship, partnership, LLC, or corporation.
Sole proprietorships and partnerships are usually unincorporated. In a sole proprietorship, a single business owner is responsible for the debts and is personally liable for federal and state taxes. The same applies to partnerships, except that two or more people share the profits and losses. Each partner is responsible for paying the respective income taxes.
A corporation is incorporated and a separate legal entity from its owner. The corporate entity is taxed, and shareholders can also be taxed for dividends, depending on whether it is an S corp or C corp designation.
An LLC appeals to individual business owners because it isn't considered a separate legal entity by the Internal Revenue Service and offers flexibility in decision-making that occurs with sole proprietorships and partnerships. Just like a corporation, LLC members are shielded from personal liability on losses, debts, and taxes. An LLC doesn't have to deal with tracking meeting minutes and navigating the complex business structure of a corporation, but at the same time can enjoy tax benefits similar to a corporate entity.
Key Advantages and Differences Between an LLC and Incorporated Entity
Before deciding whether an LLC or corporate structure is right for you, consider these factors.
- Cost and red tape: An LLC is less costly to start than an incorporated entity and has fewer statutory requirements. An LLC doesn't have to file articles of incorporation, for example, but instead files articles of organization.
- Easier to maintain: An LLC is not required to have an annual shareholder meeting or meet the requirement for meeting minutes, while an incorporated entity must have a shareholder meeting every year.
- Increased flexibility in paying taxes: LLCs have the option to choose how to be taxed, while corporations may be taxed twice—first at the company level and then at the shareholder level.
- Raising capital: An LLC doesn't have the ability to raise cash, while a corporate entity can issue stock.
- Not a separate entity: An LLC is not considered a separate entity, and once the owner or owners die, the LLC no longer exists, while an incorporated entity can continue in perpetuity.
- Differences in management and governance: An LLC has the option of choosing a manager or being member-managed. In general, LLCs have discretion in choosing how to govern. An incorporated entity must elect a board of directors and officers.
Is an LLC or Incorporation a Better Business Decision?
An LLC is a good option to begin, especially if you have multiple owners, need flexibility, and are starting a new business service or product. In terms of protection, an LLC allows business owners to protect their personal assets in case of financial or legal trouble. However, if you want your LLC to raise capital or issue stocks, you'll likely need to look into forming a corporation. Also, if your entity needs additional oversight, an independent board, and approved bylaws, a corporation is a more suitable option.
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