Inc. vs. LLC: Which Should I File?
Why do so many business owners choose to incorporate their businesses? Because incorporation offers many important advantages for business owners. Which structure is best for your company? It depends on your particular situation.
Answering this question involves examining a number of factors, including the number of owners involved, your present and future goals, whether the owners wish to limit their personal liability, and the desired type of taxation. As you consider which alternative may be best for your business, it’s always good practice to consult with your CPA.
Three Most Common Corporate Structures
Deciding on incorporation is just the first step. The next step is to determine which corporate structure is best for your business. The three most common corporate structures are:
- C Corporations
- S Corporations
- Limited Liability Companies (LLCs)
A corporation is a separate legal entity; stockholders generally cannot be held personally responsible for the corporation’s debts and liabilities. Depending on the structure, it may be possible to raise capital through the sale of stock. Plus, each structure has its own tax advantages.
The Main Differences between the Structures
Each corporate structure has its pros and cons. Here’s how they compare in four important areas:
- Taxation – A C Corporation can result in double taxation for its owners, as corporate profits are taxed at both the corporate entity and the individual level. Both S Corporations and LLCs avoid this problem, as their profits or losses are all “passed through” to the shareholders and then taxed only at the individual level.
- Ownership Restrictions – Both C Corporations and LLCs generally have no restrictions on the number of owners. S Corporations limit the number of owners, and these owners generally must be individuals (not legal entities such as corporations or trusts).
- Paperwork Requirements – Both C and S Corporations have fairly substantial requirements for record keeping, with such items as shareholders meetings and minutes. LLCs are much easier in this regard.
- Ability to Go Public – Both C and S Corporations have the ability to go public, whereas LLCs do not. For this reason venture capital firms often prefer working with corporations.