LLC Or Inc? Which One Should I Choose For My Small Business?

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Editorial Team

When you’re starting a small business, there are a lot of things to think about. What type of corporate entity to establish will be one of your initial choices? The two most popular business entities for small firms are corporations and limited liability companies (LLCs). So, which one should your small business choose?

It is crucial to understand the differences and similarities between corporations and limited liability companies (LLCs) in terms of taxation, management structure, liability protection ownership, and compliance requirements in order to identify the option that will fit effectively for you.

As you shall see, corporations and limited liability companies (LLCs) have certain similarities and some distinctions. In addition, your company’s organizational structure should be chosen with several considerations in mind.

Here Are Some Key Differences Between Llcs And Corporations To Assist You In Your Decision.

Separate Entity Status: Limited Liability Company Vs. Corporation

LLCs: When you establish a limited liability company (LLC), you are establishing a corporation that will have its own independent legal existence, apart from the founders and members of the LLC (as the owners of LLCs are called).

Corporations: In a similar vein, when you incorporate a business, you transform it from a sole proprietorship (when you’re the only owner) to a general partnership (when you do have co-owners) into a company formally recognized by the state in which it was incorporated. This is the case with corporations.

To put it another way, when this occurs, the company develops its own distinct identity in the eyes of the law, distinct from the people responsible for its inception and the stockholders who will have ownership of it in the future.

Note: It is essential to keep this in mind regardless of whether you choose to incorporate or establish an LLC. The company’s ownership may be held by either a corporation or an LLC. You own the corporation or limited liability company.

Which structure is better, a corporation or an LLC? Both sorts of entities are utilized in situations when it is essential to have a separate legal entity, including the current scenario.

Formation: LLC vs. An Inc.

Both the process of forming a corporation and a limited liability business share certain characteristics while also displaying some key distinctions. Both are created by submitting paperwork to the Secretary of State where you reside, often known as your home state or domestic state. The document contains certain information.

Articles of Incorporation (AI) or Articles of Organization are common names for this document about corporations and limited liability companies, respectively. After that, you have to write up some bylaws for the corporation or an operating agreement for the limited liability company.

Knowing how these two forms differ is essential when deciding whether to form an LLC or a corporation.

The United States recognizes both S-corporations and C-corporations as legitimate commercial entity types. In any scenario, the first step is to file articles of incorporation with the agency responsible for business filings in your state. Articles of incorporation are legal documents that provide fundamental details about a company. 

These particulars include the firm’s name, address, and total number of shares issued. After submitting your articles of incorporation, you will need to carry out several activities to finish the setup process. LLCs are exempt from these requirements. The election of a board of directors, the creation of corporate bylaws, the holding of the first board meeting, and the issuance of shares of stock are all requirements and the holding of the first shareholder meeting.

The Articles of Organization (AO) for a limited liability company (LLC) contain fewer needed pieces of information and practically all the requirements for how it will be governed. In contrast, the operating agreement contains the rights, obligations, and liabilities of members and management.

The Articles of Incorporation (AI) and the Articles of Organization are publicly available. Not applicable is the operational agreement.

Note: If you decide whether to incorporate a company as an LLC or an Inc. if you want less information about the internal operations of the firm to be known to the public, then an LLC would dominate and be better in this situation.

Limited Liability Protection For Owners: LLC Vs. Corporation.

Forming a corporation or limited liability company for a small business is highly recommended to protect one’s personal assets from being used to pay off the company’s obligations. As was just discussed, corporations and limited liability companies each have their own separate existence in the eyes of the law. 

The corporation and limited liability company is the entity that owns the firm together with all of its assets, debts, and obligations. The shareholders or members own the corporation or limited liability firm, and the responsibility of the shareholders or members is restricted to the amount invested.

Well-established and acknowledged regulations regarding limited shareholder and member liability include the following: However, this does not imply that they will never be responsible for anything. They do not absolve themselves of responsibility for their own conduct, such as if they violate the operating agreement. If there is legislation that holds owners responsible for particular behaviors, then owners can be held accountable for such activities.

In point of fact, following a principle of law known as “piercing the corporate veil,” members and shareholders of a corporation can nevertheless be held accountable for the obligations of the business. A remedy known as “veil piercing” is one in which the courts ignore the existence of the corporation or LLC as a separate entity. Because the corporation is no longer in existence, the shareholder or member is now personally responsible for the obligations incurred by the company.

The courts use a variety of criteria in order to determine whether or not to pierce. One of the tests that are used the most often searches for two different things:

  • “A unity of interest” between the company or LLC and its owners, so the owners’ distinct identities cease to exist. And,
  • A corporation or limited liability company was utilized in order to commit fraud or do anything unethical.

The question at the heart of the unity of interest test is whether or not the shareholders or members of the LLC or corporation appreciated the fact that the entity in question was the legal owner of the firm. 

The courts are going to look at several different factors, some of which include whether or not the corporation or LLC had an adequate amount of capital, whether or not the shareholders or members used the asset of the business for their own personal gain, and whether or not there was a failure to follow compliance requirements.

This round of the super fight between an LLC and an Inc. can be considered a draw for the most part.

When It Comes To Taxes: LLC Vs. Inc. 

One of the most significant distinctions between a limited liability company and a corporation is how the entity is taxed. And when it comes to taxation, there is virtually never a tie between an LLC and a corporation. It will give an advantage to one of the two.

1. LLC Taxes

A limited liability company (LLC) is considered a pass-through business organization in the federal income tax context. That eliminates the need for it to make any payments toward the federal income tax. Instead, its profits and losses are passed on to the company’s shareholders. 

Because personal income is equal to business income, the business owner is responsible for paying tax on the income through their tax return, which is taxed at the individual rate. There is just one level of taxes because the members themselves pay the tax.

Even though having only one tax bracket is an improvement, this does not always mean paying taxes as a limited liability company is in your best interest. The self-employment tax, which stands at %15.3 as of right now, might result in a considerably higher tax burden for LLC owners in certain scenarios. In addition to this, it is important to consider if the owner is subject to a higher rate of personal or corporate income tax, as well as the exemptions and deductions to which they are entitled.

The law that applies automatically is called pass-through taxation. If you take no action, the Internal Revenue Code’s Subchapter K will treat your limited liability company (LLC) like it does partnerships for tax purposes. This is the situation when you have more than one member. Otherwise, your limited liability company will be totally disregarded for income tax if you are the only member.

However, you can tax your limited liability company (LLC) as a corporation if this benefits the LLC. If you submit “Entity Classification Election” Form 8832 to the Treasury Department, your limited liability company will be taxed following Subchapter C as if it were a corporation. 

Then, if you choose to and if your limited liability company is eligible, you also have the option to submit an additional filing to be taxed under Subchapter S. This can be done if you so want.

2. Taxation: Corporations

For income tax purposes, there are two different types of corporations. C corporations. Because they are subject to Subchapter C of the IRC taxation, these are known as C companies (IRC). S corporations are another option. S companies are known as such because the IRC’s Subchapter S governs their taxation. Double taxation applies to C corporations. S corporations are only charged one tax.

Your corporation will automatically be subject to Subchapter C taxation once you incorporate it. Your company is a distinct taxable entity, and the corporation must pay taxes on the business’s income and losses rather than the owners.

Therefore, corporations are subject to taxation at the corporate rate. The shareholders must record this revenue on their personal income tax return if the corporation distributes its earnings to them in the form of a dividend. It’s a double tax that might significantly reduce the actual earnings in the long run.

If your firm meets the requirements, you can opt to have it taxed as an S corporation. As a pass-through tax entity, an S corporation. 

Although S corporations and LLCs share this characteristic, Subchapter S imposes several restrictions that do not apply to LLCs that are taxed as partnerships or disregarded entities.

Must remain an S corporation and qualify for an S corporation election. The organization must follow strict guidelines regarding the number, nature, and types of shareholders and shares. Federal tax law, not state business law, is the source of these regulations.

In a nutshell, these guidelines consist of the following:

  • Shareholders must be either person, residents of the United States, certain estates and trusts, or tax-exempt organizations.
  • There can only be 100 stockholders total (although some family members can be counted as single shareholders).
  • There may be just one type of stock (although differences in voting rights are permitted).

3. For Management: Compare LLC And Inc.

There are numerous management arrangements for corporations and LLCs. The statute and the governing documents, such as the articles of incorporation and bylaws for a corporation or the operating agreement and articles of organization for an LLC, both regulate management.

4. Corporation

Compared to LLC rules, corporation laws have higher management responsibilities. Companies must convene yearly shareholder meetings, give notice, have director meetings, and do other related activities. A director cannot vote by a substitute and must be a natural person.

Many LLC legislation leaves it up to the members to specify how they will be administered in their operating agreement. For instance, managers are not required to be natural people and can vote by a substitute. Meetings are also optional. This gives LLC owners a level of management freedom that they wouldn’t have with corporations, which is a factor that is typically viewed as favoring the LLC over the Inc.

A board of directors is mandated by law to oversee the operations and affairs of businesses. The board chooses the officials in charge of the company’s day-to-day operations. A relatively small number of shareholder management duties exist, including choosing directors and casting votes on important business transactions like mergers.

5. LLC

An LLC, however, can choose between two different management structures. It may be member-managed, in which case all members would make decisions. A partnership-like management structure would be this. Or it might be manager-managed, where members act more like investors than managers—like shareholders—with fewer management responsibilities. The managers have a similar responsibility to corporate directors in that they oversee the business and affairs.

Note: LLC is preferable to Inc. if all owners wish to be involved in operating the company.

However, Inc. is preferable to LLC if the members wish to be passive investors, have management with more experience than they do operate the company, and want the additional safeguards offered by the corporation statutes.

Registered Agent Requirements: Inc. Vs. LLC

You must appoint and keep up a registered agent in the state where your company was formed and in each additional state where it is permitted to conduct business, regardless of whether you decide to become a corporation or an LLC.

An individual or business designated as a registered agent will receive and transmit the service of process and some formal correspondence from the state, such as the annual report form. Delivery of court documents, particularly the summons that informs your firm that it is being sued, by whom, for what cause, and in what amount, is known as service of process.

Since corporations and LLCs must do this, none has an advantage when comparing the two. Remember that selecting the wrong registered agent might negatively affect your business, such as default judgments or a loss of good standing. This is a crucial choice. We advise selecting a registered agent with experience rather than an employee, an attorney, or one of the proprietors.

For Interest Classes And Transferability: LLC Vs. Inc.

Shares of a firm can be readily transferred to other people (Unless there is a transfer restriction agreement among the shareholders.). Corporations are, therefore, a sensible alternative for companies looking for outside funding or thinking about a public stock listing.

Transferring LLC membership interests is more difficult than doing so with corporate stock. In most LLCs, new members cannot join without the other members’ approval. Therefore, the Inc. has an advantage over the LLC in terms of the capacity to sell or transfer an ownership position.

Additionally, corporations can issue a variety of stock holdings. They could have classes of common stock, one with voting rights and the other without. Alternatively, they can issue preferred stock that has priority over common stock for dividends and distributions. LLCs may offer different sorts of membership interests.

Note: This is false if you desire to pay taxes as an S company. S companies are required by tax law to issue just one type of stock.

For Ownership: Compare LLC And Inc.

Shareholders and members are the owners and have both financial and managerial rights. Other management powers include the ability to review books and records and bring derivative litigation on the company’s or LLC’s behalf, in addition to the management rights mentioned above. The financial rights include the right to receive dividends and distributions once the company dissolves in order to participate in the profits.

The ownership of stock determines the shareholders’ rights in a firm. All shareholders receive 15 cents per share if the company declares a dividend of 15 cents per share.

In an LLC, however, the members can divide the rights so that some members receive a higher payout than others. In general, choosing an LLC versus a corporation is seen as favoring the LLC’s financial freedom.

There are no restrictions on the number of owners a business may have or who may be an owner under the LLC or corporation regulations. However, Internal Revenue Code Subchapter S does.

Therefore, you must adhere to the limitations outlined in the income tax discussion if you want a corporation or LLC to be taxed as an S corporation.

For Record-Keeping Purposes: LLC Vs. Inc

Both corporations and LLCs are required to maintain records. Records must be kept, including names of shareholders and members, tax filings, and the governing papers.

Additionally, it is a legal requirement that members, managers, shareholders, and directors have access to these records. Members and shareholders may request access to additional documents if they have a legitimate reason and adhere to specific legal requirements.


As a result of carefully weighing each company structure’s benefits and drawbacks, there’s no clear-cut answer as to which one is better. The best decision for your small business depends on various factors, such as your business’s nature, goals, and personal preferences. 

With that said, LLCs and Incs each have strengths and weaknesses, so it’s important to weigh all your options carefully before deciding.