KPMG Spark Blog

LLC vs Inc: Advantages + Disadvantages

If you are setting up a business then one of the most important decisions you will need to make is the company structure you choose for that business. Two of the most popular business structures are corporations (also known as Inc., which is short for incorporated) and limited liability companies (LLC).

While both of these business structures offer limited liability that will protect your personal assets in case of a lawsuit against the company, they are unique from one another in terms of management, structure, and taxation. Understanding the advantages and disadvantages of each company structure will give you a better idea of which one is right for your business.

LLC vs Inc: Taxation

For many people, taxation will be the main driver behind whether they choose to establish their company as a corporation or an LLC. If you choose to form your business as an LLC then you will be subject to "pass-through" taxation. What this means is that the business itself will not pay taxes. Rather, those taxes are paid by the individual members of the LLC and the losses and expenses that the business generates will be reported on individual tax returns.

Corporations can be quite different depending on the type of corporation your business is. An S corporation is, like an LLC, a "pass-through" tax entity, so the corporation itself is not taxed and individuals can use business expenses as deductions on their personal tax returns. A C corporation, on the other hand, is a separate entity and is taxed separately from its shareholders, members, and directors. Corporate income splitting can also result in lower overall tax obligations for a C corporation. However, shareholders may also have to pay taxes on any dividends that are paid out to them by the corporation, leading to "double taxation."

LLC vs Inc: Structure

Aside from S corporations, which are limited in size and may be profitably used by self-employed individuals, corporations are generally suitable for large entities. Corporations are owned by the shareholders of that company and are operated by the officers. Officers are appointed by the board of directors and the board of directors are, in turn, elected by the shareholders. Because of the complex structure of a corporation and the fact that the directors and officers are accountable to the shareholders, there tends to be limited flexibility in how much control one individual can exert over the corporation. Furthermore, corporations are required to record minutes and hold annual meetings.

An LLC, on the other hand, is often a more appropriate structure for a smaller business entity. An LLC has members instead of shareholders. Members exert a great deal of control over the day-to-day operations of the company. Members may also appoint managers to limited terms who carry out various duties in maintaining and administering the affairs of the business. While members do enjoy greater flexibility in how they operate the company, LLCs cannot issue stock, which may make raising capital more difficult.

LLC vs Inc: Formation

Forming an LLC is generally easy and does not require a burdensome amount of paperwork. While requirements differ from one state to the next, in most states LLCs require a document called either the "rules of organization" or the "articles of organization." Some states may also require an "operating agreement," which stipulates how the company's income, management, membership, and general operations are to be structured.

Forming a corporation is more complicated and certainly more expensive than forming an LLC. A registration fee, which can run into the thousands of dollars in some states, will have to be paid. Additionally, the Articles of Incorporation will have to be filed and this document will lay out such vital information as where the corporation is located, what business activities it is engaged in, and how many stocks (and of what type) it will be issuing.

A corporation will also need a name that is distinctive and which also describes the main activities of the corporation. In some states, the name will have to include "Inc." at the end to distinguish it from other business structures.

Final Thoughts

Setting up a new business or changing the structure of an existing business presents many unique and exciting opportunities in terms of your company's structure. Incorporation and LLCs offer similar benefits in terms of liability, but they differ substantially in terms of taxation, structure, and formation. It is crucial that you understand these differences as they could be the elements that determine the success and profitability of your business moving forward.

Other Articles You May Find Helpful:

PLLC vs. LLC: Which Entity Should You Incorporate as?

The Pros and Cons of Acting As Your Own Registered Agent

KPMG SparkFebruary 17, 2017Posted In: Business Tips

KPMG Spark is an online accounting service that saves you time so you can focus on what’s most important for your business.

3 ways that having a human bookkeeper can make your life easier

Hiring a trained bookkeeper ensures that your money is being managed correctly and that nasty surprises don’t catch you off guard.

Ben AsplundJanuary 12, 2021Posted In: Business Tips

Frequently Asked Questions about KPMG Spark

Wondering what KPMG Spark is all about? Here, we have put together some of the most frequently asked questions we get at KPMG Spark to help you navigate your online bookkeeping experience.

Ben AsplundJanuary 5, 2021Posted In: Business Tips

3 Bookkeeping Leading Practices

Whether you get your bookkeeping done with a professional—as you get with us at KPMG Spark—or you do it all on your own, there are important things you can do to make it easier for you and your bookkeeper. Here, we will outline three leading practices for bookkeeping we recommend to our clients.

Ben AsplundDecember 15, 2020Posted In: Business Tips

Differences between cash and accrual accounting

Learn the differences between the cash and accrual accounting methods and see how your online bookkeeper can help you keep up on all your online accounting demands.

Ben AsplundDecember 8, 2020Posted In: Accounting Resources

The true cost of doing your own bookkeeping

The appeal of doing your own bookkeeping is perhaps obvious: not having to pay someone else to do it for you. But the important thing to consider when you are thinking about doing your own bookkeeping or outsourcing it is what you are losing from taking that time from your business.

Ben AsplundNovember 3, 2020Posted In: Business Tips

Reaching the growing millennial workforce

Stay on top of what you should know about attracting and retaining a millennial workforce, and KPMG Spark, a small business CPA firm, will help you stay on top of your online accounting and bookkeeping. This blog's author is a millennial and the content therein represents the views of the author.

Ben AsplundOctober 27, 2020Posted In: Business Tips

4 Tips on how to keep your business afloat in a challenging economy

In any kind of economic downturn, small businesses are often hit the hardest. It’s now more important than ever to be creative and find ways to make your customers happy.

Ben AsplundOctober 13, 2020Posted In: Business Tips

The 4 Stages of Startups

As an online bookkeeping company, KPMG Spark has experience to help you understand your position in the business lifecycle of a startup that just might help you stay a bit ahead of the game.

Ben AsplundOctober 6, 2020Posted In: Business Tips

How to manage your payroll

Use these tips to help manage your small business payroll and remember, KPMG Spark facilitates payroll and and offers invoicing services in addition to online accounting services.

Eric BeardenSeptember 29, 2020Posted In: Accounting Resources

Subscribe

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.