When setting up a new company two options are to incorporate and set up a corporation (Inc.) or to set up a limited liability company (LLC). Both provide the benefit of personal liability protection, where your personal assets are protected from claims against the corporation. This is a major benefit as if the company fails or happens to be sued you will not end up also losing your personal assets. There are, however, significant differences between the two and this article will help guide you through the decision of Inc. vs. LLC.
Incorporating is the most widespread approach when setting up a business and wanting to protect your personal assets. Key advantages when it comes to incorporating include:
- Minimize Taxes - Depending on the income your business generates you can potentially keep business income and personal income (taken through salary) in lower tax brackets. Splitting income in this way can minimize your overall tax burden.
- Widespread Acceptance - As LLC's are a relatively new concept it can sometimes be difficult to obtain funding or access to certain vendors who prefer to deal with corporations.
- Going Public - An LLC cannot be publicly traded and as a result any company looking to grow and eventually either go public or be acquired by a venture capitalist will need to be a corporation.
- Extra Taxes - Corporate income is not subject to Social Security or Medicare taxes, whereas an LLC being structured as a personal income flow through will see income subject to these taxes.
- Additional Benefits - When you have a C corporation you can pay yourself certain benefits like life insurance and parking without being subject to personal tax on the benefit. With an S corporation, LLC, or sole proprietorship these fringe benefits are taxable for anyone holding more than 2% of the business.
Limited Liability Companies are becoming more and more common and for those not seeking to eventually go public they can be the best way to go. Key advantages when it comes to setting up an LLC include:
- Filing Requirements - Corporations are required to file a fair amount of ongoing 'admin' paper work related to articles of incorporation, holding and recording director and shareholder meetings, and holding shareholder votes on major decisions (even if there are only 2-3 shareholders). All this needs to be documented and recorded and can be cumbersome for business owners. An LLC doesn't need to do any of this.
- Single Taxation - An LLC is a flow through entity for tax purposes and doesn't pay taxes on its own behalf. All income flows through to the owners who record income on their personal tax returns.
- Ownership Flexibility - LLC's have more flexibility in terms of who can own them, particularly when compared to S corporations that have extensive limits on the number of owners and where they can reside.
- Deductibility of Expenses - LLC losses can be deducted against your other regular income when they are incurred. This cannot be done in corporate business structures.
Inc. vs. LLC
Determining how you want to structure your company should be influenced by where you see the company going and what your ultimate goals are. If you're planning on going public, having operations across many states, or having significant income to manage and split, you are likely to want to incorporate. If you're planning on a smaller scale where your main focus is on effectively protecting your personal assets for the minimum work required, then an LLC is likely your best alternative. Many small service providers and businesses are adopting the LLC model and the popularity of this form of business is expected to grow significantly over the coming years.