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“LLC or Inc?” What is the correct structure for your business? Is it an LLC (limited liability company) or is it a corporation (Inc.)? There is no single, one-size-fits-all answer. To solve the choice of entity puzzle, you must fit together these four different pieces:
These four factors differ significantly between a limited liability company (LLC) and a corporation (Inc.).
Actually, both corporations and LLCs provide limited liability protection. Corporations and LLCs have their own legal existence. They own the business, and they are liable for the business’ debts and liabilities. The shareholders of a corporation and members of an LLC are not liable for the business’ debts. Their liability is limited to their investment. But, keep in mind, whether the business operates as an LLC or a corporation, all the entity’s assets are at risk for the entity’s debts.
However, sometimes the entity may also need protection from the debts and liabilities of its owners. While both an LLC and a corporation offer some protection, there are differences in the way that protection operates.
The second factor to consider in the "LLC vs. Inc." question is who will be calling the shots—both tactically (day-to-day) and strategically (long-term). Who has the right to decide which issues can tip the balance in favor the LLC or the corporation.
Businesses need to make money to survive. So, every business owner must consider: “How will this company get the money it needs to get started and to grow?”
Investing in a business is also about making money. So, every business investor asks: “What are my financial rights to share in distributions during the entity's lifetime and upon its termination?”
The first difference that most people think of when considering an LLC versus a corporation is taxation. Conventional wisdom touts the LLC as the tax-preferred entity type. However, for many businesses, this might not be the case.
When it comes to the difference between an LLC and a corporation (Inc.), there is no one perfect entity choice. However, considering the four factors listed above will help the small business owner determine the best for his or her particular business, along with the advice of trusted legal and tax advisors.
Information in this article was updated March 2018. The original publication date was April 14, 2014.
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