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

Subscribe

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

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

The Hidden Costs of Doing Your Own Bookkeeping

 You may view doing your company’s bookkeeping as a point of pride, or simply as a way to save money. But there are many costs associated with “do-it-yourself” bookkeeping that business owners often overlook. Join us to see how outsourcing your bookkeeping can help you and your business.

KPMG SparkApril 13, 2021Posted In: Accounting Info

4 Benefits of Choosing KPMG Spark for Your Bookkeeping

Entrepreneurs often start out trying to do their own bookkeeping but quickly realize they need a bookkeeping solution that not only makes it easy, but also one that addresses their evolving business needs — such as managing cash flow as their business grows. Let's take a closer look at how KPMG Spark can help your business.

Jonathon WalkerApril 6, 2021Posted In: Business Tips

Managing Cash Flow in 2021

The insight provided by an updated, thorough examination of upcoming cash flows can help business owners make more informed decisions and best leverage the cash they’re generating. Let’s look more closely at some leading practices for generating a cash-flow projection and how it can help your business.

KPMG SparkApril 2, 2021Posted In: Business Tips

Embracing Managed Accounting: 4 Ways to Inspire Your Employees When Switching Bookkeeping Platforms

Getting employees on board with change can be challenging – even if everyone involved knows it’s for the better. This was at the forefront of our minds when we first created KPMG Spark.

KPMG SparkMarch 25, 2021Posted In: Business Tips

KPMG Spark launches Spark 1.1

KPMG Spark is always listening to small business owners to learn more about the resources and tools they need to help their businesses succeed. The Spark team listened to what our clients had to say and recently launched KPMG Spark version 1.1. 

Sam HunterMarch 23, 2021Posted In: News

Member Spotlight: How Hoban Optometry is Scaling Smart with Managed Accounting

With organized, real-time accounting, a complete picture of critical financial data, and expert recommendations from a trained professional, the Hobans can continue to provide care to every patient while creating a robust and sustainable business for decades to come.

KPMG SparkMarch 9, 2021Posted In: Client Stories

4 tips for managing business cash flow

Maintaining a healthy business cash flow is one of the most important building blocks for any business to achieve meaningful growth. Join us so you can scale your business and make big purchases with confidence.

Ben AsplundMarch 2, 2021Posted In: Business Tips

KPMG Spark launches Tax Tips blog section to help small business owners

To alleviate tax season stress, KPMG Spark has launched a Tax Tips blog, specifically designed to give small business owners an easy place to find crucial information and deadlines.

Sam HunterFebruary 23, 2021Posted In: News

Automating your business tax system

Doing your own taxes can seem like the optimal solution, but we can become our own stumbling blocks when dealing with important financial information. Join us to see the benefits of implementing an automated tax system through online solutions.

Ben AsplundFebruary 23, 2021Posted In: Business Tips