Compare LLC and Inc.

An Inc. is short for incorporated and an LLC stands for a limited liability company. Both protect company owners from personal liability for business obligations.

By Brad Nakase, Attorney

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Is It Better to Choose an LLC or a Corporation?

When an entrepreneur decides to start a small business, one of the major decisions they will make is what entity to become. In general, most small business owners decide to form a limited liability company (LLC) or a corporation. An LLC and a corporation are mainly different in that a limited liability company has one or more owners, while shareholders own a corporation.

Regardless of which entity type a business owner chooses, both types of entities offer advantages to one’s business. For more information, please contact our business attorney for a free consultation on forming an LLC or Inc.

What Does Limited Liability Mean?

Limited liability is a kind of protection for a business owner’s personal assets. This protection makes sure that a business owner’s personal liability for their company’s obligations and debts is no greater than the amount of capital he or she invested in the company. This means that in the event of a lawsuit or debt collection, a business owner’s personal assets, such as their house, car, and bank accounts, are safe from being seized.

If a business owner does not have limited liability protection, then it is possible their home or car could be offered as a form of collateral to pay off business debt in the event of bankruptcy or a lawsuit. This is certainly one of the biggest advantages of forming one of these business entities.

Are an LLC and a Corporation the Same Thing?

A limited liability company is not a corporation. Rather, an LLC is a unique entity that mixes the liability protection that comes with forming a corporation with the simplicity of a sole proprietorship.

There are certainly benefits of starting a corporation, such as liability protection and tax savings. But in order to determine which is right for one’s personal business, it is necessary to look at the pros and cons of both entity types.

What Is the Difference in Taxation Between an LLC and a Corporation?

One of the major differences between LLCs and corporations is the method by which they are taxed.

Taxing LLCs

An LLC is taxed, by default, as a pass-through entity, which means that the business’ profits are “passed-through” to the owners (members). This means that the owners report the business’ losses and profits on their individual tax returns rather than at the company level. Thus, LLC owners tend to have an easier time filing taxes. The business’ operating costs or losses can be deducted on personal tax returns. This can assist in offsetting other income.

When it comes to an LLC’s tax rate, it will depend on the income of the owner, similar to when one files as a sole proprietor. LLC owners may also need to pay self-employment taxes. Some states ask that LLCs pay a franchise tax, which a state issues in return for the benefit of conducting business in the state. This type of tax is generally paid annually, though it can vary depending on the state.

If a business owner does not pay their taxes on time, there could be penalties. Their business might also be dissolved against their will.

Thankfully, incorporating offers entrepreneurs some tax flexibility. An LLC may wish to be taxed as a C Corporation, which makes sense for some companies.

Corporation Taxes

A corporation is taxed as its own legal entity that earns its own income. Corporations pay tax on profits (corporate tax), as well as tax on the dividends that the company gives to its shareholders. Because dividends may not be deducted, in the way bonuses and salaries are, dividends get taxed twice. This phenomenon is known as double taxation. This is not a big deal for small corporations that have only the owners working for the company. In this case, the owners get tax deductible bonuses and salaries.

Double taxation may be viewed as a negative aspect for businesses that are considering filing as a corporation. However, the additional tax can be offset by federal deductions meant only for corporations.

For instance, a corporation may deduct its company expenses. These expenses may include advertising costs, operating expenses, in addition to employee benefits like retirement and medical plans. All these deductions can add up to significant savings in the long run.

A business owner should remember that if a corporation has less than one hundred shareholders, it has the opportunity to file as an S Corporation. This tax status permits a company to be regarded as a pass-through entity, similar to an LLC. This could be a good choice for a business that desires the taxation of an LLC but prefers the formalities that a corporation offers. While S Corporation designation allows for pass-through taxation, a business must meet certain qualifications to be classified as an S Corp.

S Corporation Taxes

If a company elects to qualify as an S corporation, the tax differences between an S Corp and an LLC become somewhat less obvious. Both entity types have pass-through taxation. However, an LLC’s distribution of profits is subject to an employment tax, while an S Corp’s dividends are not.

What Is the Difference in Business Ownership Between LLC and Corporation?

When an entrepreneur is deciding whether they want to form an LLC or a corporation, he or she should also consider the matter of ownership. Each entity’s ownership structure is different, and each will have an impact on how a business is operated.

A corporation may offer stock and sell percentages of the company to its shareholders. These shareholders, or owners. Are allowed to transfer shares, purchase more stock to own more, or sell off stock so that they own less. If an entrepreneur would like to draw in outside investors, then a corporation may be the most suitable option. A corporation also lives on indefinitely, separate from its owners, which means that even after an owner departs or dies, the corporation continues.

A limited liability company may give its ownership stake to its members, or owners, regardless of a member’s financial contribution to the company. Let us say that a member of an LLC did not invest as much capital as another member did. According to an LLC’s operating agreement, it could be that all member receive an equal share of the profits regardless. This allows for more flexibility when setting up the ownership of the company.

Foreign individuals or corporations may also own LLCs.

An LLC’s operating agreement details how membership interest can be moved among members, as well as what occurs when a member departs from an LLC. If these details are not listed in an operating agreement, then an LLC must be dissolved when a member departs.

What is the Difference in Management Between LLC and Corporation?

Limited liability companies benefit from having a management structure that is flexible. The company may be run by its owners or by a group of managers – in fact, any member may be a manager of the LLC. An LLC may also choose to have no difference between its managers and owners. As a flexible entity with few formalities, an LLC may be very popular with entrepreneurs who desire a bit more freedom or laxity.

If an LLC is member-managed, then the owners are themselves overseeing the company’s daily operations. If the company is manager-managed, then this means it has investors who watch from the side, but do not actively participate in the company’s operations.

Meanwhile, the management structure of a corporation is a lot stricter. A corporation is required to have a formal structure, as well as a Board of Directors that deals with the management duties involved in raising profits for shareholders. Corporate officers are in charge of managing daily operations. A corporation’s shareholders are viewed as owners of the company, but they do not make day-to-day decisions.

That said, shareholders have the power to choose directors, and individual shareholders may be chosen as a director or made an officer. A corporation must also have rules dictated by corporate bylaws. These are a set of rules that a Board of Directors adopts after the corporation is founded.

What Are the Differences in Formal Requirements Between LLC and Corporation?

LLCs and corporations are both required to meet requirements related to maintenance and reporting. These requirements are particular to the state where the corporation was formed. By reporting on time and accurately, a business remains in good standing, thereby keeping the benefit of limited liability protection. Each state has its own regulations and rules concerning LLCs and corporations, but in general, corporations have more annual requirements than LLCs.

In terms of formalities, corporations must hold a yearly shareholder meeting every year. The details of this meeting must be recorded in corporate minutes. Corporations are also suppoed to file annual reports. The purpose of these reports is to keep the Secretary of State informed of the corporation’s current information. If the business undergoes any changes, these must be decided via a corporate resolution during a meeting with the board of directors.

LLCs have fewer formalities than corporations. For instance, an LLC does not need to hold yearly meetings, keep meeting minutes, or even have a board of directors. Some states want LLCs to file annual reports, but others do not. One may check with their Secretary of State to learn the relevant rules and regulations for LLCs.

How Is a Legal Entity Different from a Tax Entity?

It is common to be confused as to the difference between tax entities and legal entities.

A tax entity may be defined as the way the IRS views a business. This will determine how a business is taxed. Examples of tax entities include sole proprietorships, C corporations, and S corporations. Legal entities have some say in what tax entity they would like to be classified as. LLCs and corporations may file as an S Corp and thus be taxed as one, though both are different legal entities.

In general, LLCs enjoy more freedom in terms of choosing their tax identity.

What Are the Legal Differences Between LLCs and Corporations?

Corporations and LLCs both offer benefits to their owners in terms of legal protections. That said, these entities are viewed differently by the courts in some respects.

Corporations have a long history in the U.S., so the laws regarding this type of entity have become standard and accepted. This means that the country has centuries of legal history that it may refer to in resolving corporate disputes. Corporations, therefore, enjoy legal stability.

By contrast, limited liability companies are fairly new. The entity was first acknowledged in the 1970s as a combination of the corporation and the sole proprietorship. An LLC, therefore, takes on legal aspects of both these entities. That said, because LLCs are relatively new entities, states treat them differently.

Most states share comparable LLC laws, though there are some differences that may make forming a corporation preferable in certain states. In time, laws regarding LLCs will become more regular throughout the country.

What Is Involved in the Incorporation Process?

Incorporation is the process a business owner must follow to turn his or her company into a corporation or a limited liability company (LLC). Incorporating a business turns it into its own legal entity with similar rights and duties as a person.

The process of incorporation may be reduced to the following simple steps.

File Articles of Incorporation

Articles of Incorporation is a document that must be completed and filed with the Secretary of State in a business’ home state. This form will include all the important information about a company. The document must include, at minimum, the following information:

  • The name of the corporation
  • The purpose of the corporation
  • The principal place of business
  • If stock will be issued
  • How many shares will be issued
  • The value of the shares

Depending on the particular state in which a business files, the fee to file Articles of Incorporation ranges from $25 to $1000.

Pick a Name

Believe it or not, there is a lot that goes into the naming of a business. It is important that a business owner conduct the necessary research before incorporating. Each state has requirements about naming that must be met. First, a business name that is available for use. This means if a another corporation in the state shares the same name, then an applicant cannot use that name. A corporation also cannot use certain restricted words, such as “bank” or “insurance.” A corporation’s name also cannot be confused with a government agency. It is also important that the name have the proper suffix. This means that the name should end with “inc.,” “corp.,” or “LLC,” to indicate that business is incorporated. Corporation names tend to share the following elements:

  • A descriptive name that tells consumers what the business does
  • A distinctive name that makes the business stand apart
  • A legal ending that is required by state law

File the Operating Agreement

Even though some states do not require this document to be filed, it may still be a good idea to do so. This agreement details every aspect of one’s business. If a business owner wishes to assign managers to the company, this is the document on which they would be listed. A business owner may also include the future goals of the business. Now is also the time to consider the type of business one wishes to incorporate. Does an owner want his or her company to be an LLC or a corporation? If a corporation, then an S corporation or a C corporation? What about a general partnership or limited liability partnership? Each of these business structures has its own benefits and drawbacks, so an owner should do their research.

File Bylaws

Depending on the state, new corporations may need to file bylaws. Bylaws are a document that concerns the administrative governance of a company. It includes details on voting procedures and annual shareholder meetings, among other topics.

Appoint Directors

Appointing directors is not a mandatory step. That said, a lot of business owners will appoint directors or managers to operate the business, both on a grand scale and on a day-to-day basis. Often, having directors can help a business attain its goals. If there is only one or two owners, then it can be hard to handle all the responsibilities that come with operating a business. By having directors, it is easier to manage complications or difficulties that may arise. It can also help to have a different set of opinions to listen to. It is all too easy for an owner to make all his or her own decisions without any feedback or challenge.

When it comes to operations, directors are typically in charge of larger decisions, such as deciding when to sell stock and for how much. Owners can act in the role of directors, but it is not necessary that they do. Managers, on the other hand, will control business operations on a day-to-day basis and are not involved as much in the larger picture. Depending on the state, there may be rules about how many managers and directors a company can have.

Appoint a Registered Agent

In most states, it is required for a business to appoint a registered agent. The agent is a person put in charge of service of process. This means that the individual will be responsible for delivering legal materials to the business in the event of a lawsuit. He or she is essentially the contact person. In most states, a registered agent can be as young as 18 years of age. There are companies that offer the services of registered agents for a fee.

Get an FEIN

FEIN stands for Federal Employment Identification Number. It is a business’ unique identifying number and can be acquired for free. An FEIN is required to open and keep a bank account and business credit card.

Open a Bank Account

It is important that a business owner keep business expenses separate from his or her personal assets. To keep them together could lead to problems in the event of a liability issue. Opening a business bank account is a critical step in setting up a business’ account structure.

Set Up Accounting

Accurate and consistent bookkeeping is important for a new business. When a business is incorporated, it is essential that the owner complies with local, state, and federal laws. This means that he or she will need to pay fees, file reports, and get business licenses and permits as required. This is a lot of responsibility! To keep everything in order, it is important to have a reliable accounting method set up. This may mean hiring an accountant or buying an accounting system.

Hire Employees

A new corporation that wishes to hire employees has other requirements that must be met. An owner will need to purchase unemployment insurance and workers’ compensation. Because he or she will also be responsible for payroll, this means extra books and records that must be kept.

Create a Shareholder Agreement

A shareholder agreement is a necessary document for a business that intends to issue stock shares. This document goes over the procedures of selling and transferring stock, as well as other administrative procedures.

Hold a Board Meeting

At the first meeting of directors, the board will make certain decisions about the company’s administration and operation. They will discuss the fiscal year ahead, appoint officers, authorize and issue stock, and create and adopt bylaws. This is also the time that a vote should be held on whether to become an S corporation. An S corp, as it is called, has certain tax benefits, but will only work for certain types of companies.

Issue Stock

A corporation cannot start operations until shares have been issued among owners. If a corporation is large, it needs to register its stock with state securities agencies and the Securities Exchange Commission (SEC). Small corporations will usually only issue stock to 35 or fewer individuals. This means that they do not have to register with the SEC. Depending on the state, there may be specific SEC exemption rules. It is important that a business owner takes care to record the names and information of all stockholders. Also to be recorded are the shares that each person has bought, and how he or she paid for the purchase. In return, each shareholder will get a stock certificate.

How to form an LLC?

Forming an LLC is generally easier than forming a corporation. Still, there are administrative tasks to be completed and compliance requirements to be addressed. Luckily, the process of forming an LLC can be reduced to eight straightforward steps.

Step 1: Choosing a State

A business owner can choose any state in which to form his or her LLC, even if the LLC will not be conducting business there. Still, generally speaking, owners will choose to form the LLC in the state in which they plan to do business. This is most often the state in which the owner lives. If an owner chooses to register his or her LLC in a state in which they do not plan to do business, they will have to register the LLC as a foreign LLC in its home state. This can increase formation and administration costs.

Cost, taxes, and LLC laws vary from state to state. Some states, such as Delaware, are popular choices with small business owners. The choice of state really depends on what amount of administration costs and duties one in willing to put up with.

Step 2: Choosing a Name

A business owner looking to form an LLC will have to choose a name that is unique and available for use. This means that the name cannot already be in the Secretary of State’s records as the name of another business entity. Many businesses operate under a “doing business as”, or DBA. This is a name that can be used in place of the LLC’s legal name.

In order to ensure that a name is available for use, an owner should do an LLC name search on the Secretary of State’s website. If an owner is not ready to complete the formation process yet, he or she may still reserve the name for later use. This is a good idea, because the name might be taken otherwise. Many states will allow an owner to do this for a small fee and for a short time period.

Once an owner comes up with an original and available name, it is also a good idea for them to do a trademark search. This will help the owner avoid intellectual property infringement and confusing customers. For instance, there cannot be two cookie shops names “Jenna’s Baked Goods.” This would confuse customers and potentially violate one of these store’s trademarks.

Step 3: Choose a Registered Agent

When an owner forms an LLC, whether in California or another state, he or she needs to have a registered agent in the state of formation or qualification. Don’t worry if you aren’t familiar with this term; in fact, many business owners have not heard of what a registered agent really is.

A registered agent is also known as an agent for service of process. He or she is appointed by an LLC to receive important legal documents such as notices, lawsuits, and tax documents on behalf of the LLC. These also include communications from the Secretary of State, such as annual reports and statements.

Technically, the owner of an LLC can choose to be the LLC’s registered agent. However, there a few good reasons why a business owner should choose a registered service agent provider instead. For instance, if the registered agent is unavailable when time-sensitive documents are sent, or if the documents are mishandled, then the LLC will face big problems. It is best, therefore, to have professionals handle this kind of important matter.

Also, a registered agent should have a physical address in the state and cannot use a P.O. Box. So, if one’s LLC is in California, an owner cannot appoint his cousin Jeff in New Jersey to be his registered agent. Sorry, Jeff! The owner will need to appoint a registered agent in California, and he may want to pick someone a bit more reliable than Cousin Jeff.

Step 4: Create an LLC Operating Agreement

Almost every state requires that an owner create an LLC operating agreement. In most states, it can be created orally, but even so, it is a very good idea to have a written operating agreement. This document is an agreement between owners, or members, of an LLC. It details how the company will be operated. Even if an owner is the only member of an LLC, it is still good to have the formality of a written operating agreement. This demonstrates that an owner respects the LLC’s separate existence and can help prevent piercing the veil (losing limited liability status). This can be a chance for an owner to put into writing what will happen in certain circumstances, such as when the owner can no longer manage the business. It is possible for the owner to put in terms regarding how he or she wants the company to be handled after his or her exit.

It is very important that LLCs with multiple members have an operating agreement in writing. The document will detail the division of ownership, as well as profits and labor. The agreement can thereby help prevent disputes between owners. The document also lists who has what authority, and how votes should be conducted among members. It also lists how membership interests can be transferred, how new members will be added, and how profits and losses will be distributed. In order to be sure all bases are covered in the agreement, it is a good idea to have an attorney look over it.

Step 5: File with the State

An LLC does not officially exist until LLC formation documents are filed with the Secretary of State’s office. These documents are known as a Certificate of Organization, Certificate of Formation, or Articles of Organization. Filing fees will vary based on the state.

You may have heard of LLCs being “incorporated.” Technically, the correct way to talk about an LLC’s formation is to say that it has been “formed” or “organized.” “Incorporation” or “Articles of Incorporation” refer to the creation of a corporation.

Each state will have different requirements when it comes to the formation of an LLC. That said, there are certain common elements, which include the following:

  • Name, main location, and purpose of business
  • Registered agent’s name and address
  • Will the LLC be member-managed or manager-managed

Standard Articles of Organization are available from each state for owners’ use. The person forming the LLC must sign the document. Depending on the state, the registered agent may also need to sign.

When the Articles have been approved and filed, the state will respond by issuing a certificate or other document providing confirmation. This certificate functions as legal proof of the company’s status as an LLC. The certificate may also be used to open a business bank account, get an EIN, etc. Sometimes, it is necessary for a business to also publish a notice in a newspaper declaring the formation of the LLC. This will depend on the state in which the Articles are filed.

Step 6: Get an EIN

Once an owner establishes his or her LLC, they must apply to the Internal Revenue Service (IRS) to receive an employer identification number (EIN). An LLC will use this number on all of its bank accounts and tax filings. If an LLC wishes to do business in another state, then it must apply to that state’s tax department for a sales tax identification number. It must also register with that state’s labor department.

Step 7: Open a Bank Account for the Business

While this step is not legally required, it is a good idea for any LLC owner. Because the business is now a separate legal entity from the owner, it is essential to separate person finances from business finances. When a court considers whether to “pierce the veil” and potentially remove limited liability, it will look at this factor – whether finances are separated. Therefore, it is crucial that an LLC owner opens a business bank account. A business credit card can help keep personal and business expenditures separate, and it can also help build business credit.

Banks will generally request certain details: formation date, business type, as well as owners’ names and addresses.

Step 8: Register in Other States (Optional)

Sometimes an LLC will want to conduct business in a state(s) other than that in which it formed. In this case, the owner will have to register, or foreign qualify, in each of the other states. This process requires filing an application with the Secretary of State. Often, a Certificate of Good Standing is also required. The company will also have to appoint a registered agent in the “foreign” state.

There are several factors used to assess whether an LLC is actually conducting business in a state and needs to “foreign qualify.” Some of the guidelines include whether the company:

  • Has a physical location in the state
  • Has employees in the state
  • Accepts orders in the state

Each state will have different criteria for what qualifies as conducting business.


Both limited liability companies and corporations have their advantages and disadvantages, though both share limited liability protection. In the end, a business owner must analyze which entity best fits their company and will serve it long-term.

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