Inc. vs. LLC: Which structure is better for small businesses?

Forming an LLC is almost always the best choice for new business owners.

Many of the biggest and most successful companies are formed as corporations. So when aspiring business owners officially register their business, many opt to form a corporation (Inc.).

For new business owners, that’s usually a mistake. It’s much easier, quicker and cheaper for first-timers to form a limited liability company (LLC) instead. On top of that, an LLC offers a lot more flexibility with your business’ tax structure.

You should consult your CPA and attorney before starting your business – since they can give you the best tax and legal advice based on your business’ goals. But if you’re like most business owners, here’s why you’ll benefit from starting the business of your dreams as an LLC.

 

At a glance: LLC vs. Inc.

Having an LLC or Inc. at the end of your name can impact how you’re taxed, how your business is run, how many owners you can have and more. Here’s a side-by-side look at some of the main features of LLCs and corporations.

  How can it be taxed? Does it have to pay corporate taxes? Do I have to file business tax returns? Are formal shareholder meetings required?
Limited liability company (LLC)

Disregarded entity; partnership; C corp; S corp

No (excluding C corps) Yes (excluding disregarded entities) No
Corporation (Inc.) C corp; S corp Yes (excluding S corps) Yes Yes

 

What is an LLC?

A limited liability company (LLC) is a popular type of legal entity for small businesses. Forming an LLC offers you much of the legal protection that an Inc. does – while offering you the most tax flexibility possible.

 

Each state may have different rules or requirements for LLCs – so some states’ LLCs may require more maintenance and compliance. Regardless of your state, LLCs are generally easier and less expensive to form than corporations – which is why they’re often favorable among small business owners.

LLCs are best for:

  • First-time business owners
  • Business owners looking for a simple, low-maintenance structure
  • Business owners who don’t want to spend extra fees

Pros and cons of forming an LLC

Forming your small business as an LLC is the most common option for a lot of reasons. Here’s why it’s best for so many business owners – and some of the drawbacks to expect.

Pros

  • LLCs aren’t taxed as their own entity. The business pays no taxes – your share of the profits is only taxed once at your personal income tax rate.
  • LLCs are less expensive to set up and maintain. Corporations have a laundry list of fees associated with them, depending on their state. For that reason, LLCs are generally considered more affordable to set up.
  • LLCs have greater tax flexibility: As an LLC, you have more options on how you can be taxed. Your tax election can either be a disregarded entity or partnership by default, depending on how many owners you have. But you can also elect to become a C corp or an S corporation.

Cons

  • It can be harder to raise capital from institutional investors. Investors are usually more likely to invest in corporations than LLCs. That can make it harder for LLCs to access larger amounts of startup capital.
  • It can be harder to bring in shareholders. In an LLC, the process to bring in another owner, which are called “members,” can be tedious. In a corporation, it’s easier to welcome new owners by offering them shares.

What is a corporation (Inc.)?

A corporation, or Inc., is another type of legal entity for your business. This entity type is usually reserved for very large businesses.

There are a few different tax elections an Inc. can make. Depending on what type of tax entity you are, you may end up paying more in corporate taxes – which LLCs aren’t expected to do.

Corporations also tend to have outside shareholders that are issued dividends, or stock payouts. There’s typically no limit to the number of owners a corporation can have. If it elects to be taxed as an S corporation, then the limit is 100 owners.

Corporations are best for:

  • Businesses that are looking to take on a lot of investors
  • Businesses that are rapidly growing in revenue and employees
  • Businesses that are expecting a large exit in 5-10 years when taxed as a C corp

Pros and cons of incorporating

Incorporating your business is typically not the best choice for small business owners. Learn more about the pros and cons of incorporating.

Pros

  • More appealing to investors. Incorporated businesses are more attractive to investors than an LLC because they’re easier to invest in – and they usually have solid plans for growth and stability.
  • Easier to raise capital: Corporations tend to have an easier time raising initial funds from investors and other sources.
  • Different types of stocks: You can classify stocks differently with a corporation, so more flexibility is available.

Cons

  • Dividends from corporations are “double taxed.” Dividends, the form of distributions that corporation owners take, are taxed at both the personal and corporate level if the corporation is a C corp. Distributions from LLCs are taxed only once at the personal level.
  • More regulations apply. Depending on your state, your corporation may have to create a board of directors, hold regular shareholder meetings and meet additional filing requirements.
  • Possibly less ownership over the company. If you distribute shares of your company, which many corporations do, you’re giving up pieces that you could own. While additional shareholders can benefit your business when starting out, you may lose out on making more money for yourself in the long run.

Why an LLC is best for small business owners

Forming an LLC and incorporating your business both come with perks. So what makes an LLC better for small businesses?

There’s a lot of red tape to cut through when incorporating your business. As a first-time business owner, it’s not worth all that extra time, money and hassle. You just need a simple business structure that’s easy to maintain as you build up the business of your dreams.

You’ll save a lot of time on the front end – which gives you more time to focus on business, not taxes. You’ll also save a lot of money by avoiding double taxation.

The bottom line

Starting a business is filled with a lot of tough choices. One of the most important choices is also one of the first ones you have to make: the structure of your business.

The two main options are forming an LLC or incorporating your business. It’s usually best to form an LLC as a small business. It’s easier, cheaper and simpler for first-time business owners. As you start to build the business of your dreams, you’ll inevitably want to focus on the things that excite you – which probably doesn’t include organizing annual shareholder meetings.

Not sure how to start your LLC? Schedule a free call with a DiMercurio Advisors team member today. Let an expert cut through the red tape of starting a business so you don’t have to.

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