3 Reasons to Choose an LLC over an INC

When starting a business, most new entrepreneurs face the dreaded LLC vs. INC dilemma. These are the two most popular business entities for starting a mid-sized business that you plan to expand in the future.

If you were to start a small, local business the choice would be simple—Sole Proprietorship. The confusion arises when you want to start a business for which you’d need funding to expand.

Both an LLC and a Corporation are good options to consider, but an LLC is preferable in most cases.

In this post, we’ll compare LLC vs INC and give you some key reasons why you should choose an LLC over a Corporation.

LLC vs INC: Key Differences

When comparing LLC vs INC, here are some key differences you should consider:

  • Formation: An LLC is cheaper and relatively easier to form than a Corporation that requires more documentation and has a complex formation process.
  • Taxation: An LLC offers more flexibility in taxation as it can be taxed as a Sole Proprietorship, a Partnership, or a Corporation. A Corporation will always be taxed as a separate legal entity and does not allow pass-through taxation unless you decide to form an S-Corporation.
  • Management: LLCs require an LLC operating agreement and Corporations need articles of incorporation to set forth the guidelines of how to manage the business. Still, Corporations have more rules like annual board meetings that LLCs don’t. 
  • Funding: It’s much easier to get funding for a Corporation than an LLC as you can go public by issuing shares and raise a lot of money. Even if you don’t go public, investors find it safer to invest in a Corporation.
  • Ownership: LLC members have both management and financial rights and they can choose to divide the profits any way they want. Corporation shareholders have financial rights and get profits in exact proportion to their shares. Not all shareholders have management rights or are involved in the day-to-day operations of the company.
  • Transferability of Ownership: It’s extremely easy to buy and sell the shares of a Corporation. It is relatively more difficult to bring in a new member in an LLC as it will require the permission of existing members.

These are the key differences between an LLC and an INC. Next, we’ll discuss what makes an LLC a superior option in most cases and why you should choose it over an INC.

Why Should You Choose an LLC Over an INC?

The reason LLCs are so popular is that they offer the best of both worlds. They provide liability protection of Corporations and pass-through taxation of Sole Proprietorships.

Corporations are the preferred choice for large-scale businesses or mid-sized businesses that have expansion plans. It is, after all, the easiest business structure to get funding for and to raise capital.

That said, LLCs remain the best choice for most small to mid-sized businesses. Here are some of the reasons why you should choose an LLC over an INC:

Ease of Formation

Forming an INC is a long and complex process that requires a lot of documentation and legal formalities. It also costs more than what to does to form an LLC.

Forming an LLC is relatively easier, cheaper, and faster than forming an INC. The process may vary a bit depending on the state but mostly involves the following steps:

  • Getting an EIN
  • Registering the business with the state or filing the Articles of Organization
  • Forming an LLC operating agreement

Flexibility

An LLC offers a lot of flexibility in how you want to run your business, share profits, and get taxed.

LLC members can create an LLC operating agreement that will determine how the company is run, who’s responsible for what, and how the profits will be divided.

They can choose to pay a higher share of profits to certain members. This is not possible in an INC as profits are shared in proportion to the shares held by each shareholder.

An LLC does not require complex voting procedures and board meetings to make small day-to-day decisions. It’s much easier to run an LLC business than to run a Corporation.

Tax Benefits

One of the key benefits of an LLC over an INC is that it can choose to be taxed as a Sole Proprietorship, Partnership, or Corporation. It’s a pass-through entity that is separate from the owners and can be taxed as other business entities.

This means that you can avoid the double taxation of Corporations and pay taxes on your personal income. 

LLC vs INC: Which One Will You Choose?

Both LLCs and Corporations provide liability protection and are great options for new businesses.

LLCs integrate the good features of Sole Proprietorships, Partnerships, and Corporations and are preferred by most new business owners. Corporations are great for businesses that plan to expand and need considerable funding.

Though LLCs are preferred by most businesses, the choice finally comes down to your business needs and preferences.

Go through the differences between an LLC and an INC, determine your business priorities, and then make the final decision. All the best!

Author Bio:

Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.