Inc. vs. LLC: What’s the Difference?

Inc. is short for “incorporated” while LLC stands for “limited liability company.” Both refer to styles of business organization. It’s necessary to apply to the state you live in for either designation. Additionally, while LLC stands for limited liability companies specifically, Inc. can stand for many different types of corporations.

A business corporation can take many forms, but one of its primary benefits is its ability to shield its owner’s personal assets as a separate legal entity in the event of a lawsuit.

Some corporations, like a C-corp (or C corporation), require their owners to pay their own personal income taxes alongside corporate income taxes for the entire business. You can avoid this type of double taxation by filing as an S-corp instead—in this arrangement, you pay taxes via your personal tax returns as owners rather than for the company as a whole. Additionally, nonprofit corporations still have corporate status but can avoid paying even more taxes.

Corporations can generally issue a large number of shares in stock, so long as they follow regulations put in place by the US Securities and Exchange Commission and other institutions. They must also make an annual report of earnings and allow a board of directors to hold them accountable.

A type of business structure, an LLC—or limited liability company—offers legal protection of personal assets without all the regulations and trappings of doing business as a corporation. LLCs do not pay corporate tax—instead, their owners report all income via their personal tax returns. They do not have the ability to issue stock to outside investors, relying instead on the individual members of the LLC itself. LLCs can be as small as a sole proprietorship or as large as the average corporation. Still, they’re a separate legal entity from any type of corporation in the eyes of the state.

Incorporated companies and LLCs share some key commonalities. Consider these three when comparing the two business structures:

1. 1. Duty to the state: Even though incorporated companies must provide more documentation and operate under heavier regulation from the state, both corporations and LLCs have a duty to follow all pertinent federal and state laws. This means staying up on all federal and state fees and taxes, as well as remaining mindful of regulations.
2. 2. Pass-through taxes: C-corps will always pay both personal and corporate income tax, but other types of corporations (like S-corps) can avoid double taxation just like LLCs. For example, S-corp and LLC owners pay taxes to the Internal Revenue Service (IRS) via their personal income tax forms, rendering the corporate tax rate irrelevant.
3. 3. Personal liability protection: Both incorporated companies and LLCs operate as separate legal persons from their owners. This allows you to shield your own assets and bank accounts as an owner by raising your company to either the LLC or corporate level.

Incorporated and LLC companies share some things in common, but there are important differences to note as well. Here are five key areas of difference between each type of business entity:

1. 1. Formation: To utilize either an LLC or corporate structure, you’ll need to submit a variety of legal documents to your home state’s Secretary of State. An incorporated company must file articles of incorporation, whereas forming an LLC requires you to submit articles of organization. Incorporated companies require a greater degree of documentation to both form and maintain their status than LLCs.
2. 2. Management: The owners of incorporated companies must follow corporate bylaws, while generally outsourcing the ability to oversee day-to-day operations to hired managers. By contrast, LLCs meld both ownership and management structure, with owners often serving as managers in their own right. This structure can vary in size—for example, a single-member LLC may have just one sole proprietor owning and managing the entire company.
3. 3. Ownership: Incorporated companies have annual shareholder meetings for the business owners and a board of directors to evaluate financial performance. They’re answerable to both the owners as well as their stockholders. LLCs have owners with membership interest but cannot issue shares of stock. As such, it can be more difficult for LLCs to find outside creditors or investors.
4. 4. Regulation: Whether as an incorporated company or LLC, you’ll need to adhere to some stringent record-keeping practices to ensure you can prove you’re following all the necessary corporate laws. Still, the owners of a corporation are subject to a greater degree of regulation than the owners of an LLC.
5. 5. Taxation: While both incorporated companies and LLCs pay hefty amounts in taxes, the way they do so differs. For-profit corporations have to pay Medicare and Social Security taxes for their employees, whereas LLCs pay a self-employment tax covering these and other necessary levies. Some types of corporations can avoid paying corporate taxes (like S-corps) and instead pay taxes through owners’ personal income tax forms, while LLCs always pay via their members’ individual tax returns.

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