The difference between the LLC and Inc. appended to your business name is a matter of organization. Limited liability companies (LLCs) offer a flexible management structure and direct member ownership, while corporations require a more formal approach with ownership divided among shareholders. Each organizational structure offers unique benefits for different types of businesses.
Learn what matters with LLC vs. Inc. vs. Corp. labels, which is best for certain types of businesses, and what it might look like if you transition from one to another.
The Basics: Defining LLCs, Corporations, and Incorporation
To establish the correct business structure from the outset, it’s important to understand how each type of company structure is defined.
What Is an LLC?
A limited liability company (LLC) is a business structure designed to protect the owners from personal liability for business-related debts. Owners, also called members, may run the business on their own or hire management to handle it for them.
A major benefit of an LLC is pass-through taxation. Profits from the business go to the business owner, who pays taxes on them through their personal tax returns. This protects the owner from double taxation, as they do not have to pay both corporate and personal income taxes.
Difference Between an S Corporation and an LLC
An LLC is established at the state level as a specific legal business entity, while an S Corporation is a tax designation established by the IRS to avoid corporate double taxation.
For federal tax purposes, an incorporated business can be either a C Corp or an S Corp for tax purposes. A C Corp pays corporate income taxes, but shareholders must also pay income tax on profits they receive as dividends from the corporation. Under an S Corp, profits go directly to the owner, so taxes are paid on the owner’s personal income tax return without also paying a corporate tax.
What Is a Corporation?
A corporation exists as a separate business entity from the owners. Instead of having owner-members like an LLC, the corporation’s ownership is divided among shareholders.
A corporation essentially acts as a separate legal person, which means it can sign contracts, own property, file lawsuits, and pay taxes. Similar to an LLC, owners are generally protected from personal liability for debts or legal claims against the business.
What Is Incorporation?
Incorporation is the process of creating a corporation, which establishes a business as a separate legal entity from its owners. Review your state’s requirements for business names and incorporation, and consider consulting with a business law attorney to avoid mistakes that could cost you time and money.
LLC vs. Inc. vs. Corp. Labels: What’s the Difference?
An LLC must be designated or registered with either LLC, L.L.C., or Limited Liability Company at the end of the business name. Each state has different requirements for filing, branding, and official paperwork, so check state requirements before you proceed.
Similar to an LLC, you must include a corporate designator such as Inc., Corp., Incorporated, or Corporation after the full name of the business when completing registration and legal documentation for a corporation. Inc. and Corp. are used interchangeably for corporations.
Which Option Is Right for My Business?
Small businesses with simple management arrangements typically benefit from LLC organization, while larger companies that intend to go public or offer stock options usually benefit from a structured corporate organization. The structure of your business is not permanently fixed — you might start with one and then convert to another as your business grows and changes.
For example, a business that starts as an LLC may need to switch to a corporate structure if the owners decide to raise venture capital or issue stock options to employees.
Switching between an LLC and a corporation involves more than just changing the legal name. You typically need to file legal documentation to convert the business from one structure to the other, and your governing documents, such as an operating agreement or bylaws, must allow the change. Switching from an LLC to a corporation requires different steps and filings than changing from a corporation to an LLC.
Creating or changing your business structure can be complicated. You can benefit from speaking with a business law firm before you begin.
Contact Barnett & Leuty for Assistance With Your Business Formation
At Barnett & Leuty, we offer comprehensive business legal services to help you establish a well-organized, tax-optimized LLC or corporate operation. Whether you’re starting out with an LLC formation or expanding to a more formal corporate structure, we have the knowledge and resources to guide you through the process. Contact us today to discuss your options.