When choosing the right entity for your business, most small business owners opt for a limited liability company (LLC) or a corporation (Inc). But the question is, which entity is the right one for your small business?
In today’s post, our business experts weigh things out and determine whether an Inc or LLC is better for a small business.
What is an Incorporated Business?
Incorporated businesses, also known as corporations, are a type of business that’s recognized by the state of incorporation. It allows individuals to own a distinct legal entity that’s separate from their former business partners. It is different from partnerships and sole proprietorships in several ways, particularly in operations and structure.
Corporations impose unique benefits such as easier access to capital and personal liability protection, giving them an edge over other types of business. Small businesses consider incorporating for many reasons like expansion, liability protection, and efficiency of operations.
Types of Incorporation
- Sole proprietorship
- Partnership
- Limited Liability Company (LLC)
- S Corporation
- C Corporation
- Nonprofit
Advantages
Limited liability protection is usually provided by corporations to prevent creditors from chasing their debts. As per our business experts, you can take advantage of various tax advantages, such as lower premiums on health insurance and life insurance.
Also, it can help boost your credibility and attract more potential customers. Additionally, even if the owner dies, the corporation can still exist.
What is an LLC?
An LLC (limited liability company) is a business structure that protects owners from liability. It’s typically a hybrid of a partnership and sole proprietorship.
But, unlike a corporation, the flow-through taxation of dividends and other income is allowed under a partnership instead of an LLC.
Advantages
Many business owners choose to register their companies as LLCs to limit their personal liability.
LLC prevents the owners of a company from being held personally liable for its debts. If the company goes bankrupt, its owner-investors assets can’t be pursued.
It allows you to pass all of your profits to individual owners, who are also taxed as personal income. This eliminates the possibility of double taxation.
Advantages and Disadvantages of an LLC and Corporation for Small Businesses
Corporation
Pros
- Personal liability protection
- Business continuity and security
- Easier access to capital
Cons
- Pays taxes on its own income
- Possibility of losing management control
LLC
Pros
- Flow-through income taxation
- Lower filing costs and less paperwork
- Liability protection from debts or legal issues
Cons
- You cannot pay yourself wages.
- High renewal fees
- Difficulty raising financial capital
Establishing a Sole Proprietorship
In addition to an LLC or a corporation, you have the option to establish your business as a sole proprietorship. You do not need to take any formal action to establish a sole proprietorship. Our business analysts noted that this status can be automatically generated from your business activities.
But, like all businesses, you need to have the proper permits and licenses to operate. These regulations vary depending on the industry and region.
If you decide to operate under a distinguishable name than the one you have used for your business, you will most likely need to file a fictitious name. This type of name is also called a trade name or a “doing business as” name.
Operation and Maintenance of Sole Proprietorships
Our industry experts stated that there are no formal requirements to maintain a sole proprietorship. In addition, there are no filings or governance requirements.
In fact, our business experts explained that the definition of a sole proprietorship is somewhat misleading– as not all sole proprietors make a profit. This requirement applies to any activity that intends to generate revenue. There are no maintenance requirements for a sole proprietorship, as it is not truly considered a business entity.
Tax Filing Requirements of a Sole Proprietorship
For tax filing requirements, you’ll need to accomplish a separate form for your sole proprietorship taxes, Schedule C. You’ll need to file this along with your personal income tax form, Form 1040 [1].
Personal Liability Protection of a Sole Proprietorship
In a sole proprietorship, there is no corporate veil– in short, no personal liability protection. There is no separation between personal finances and business finances.
You need to form a legal entity to protect yourself from liability, and the only way to do so is by establishing an LLC or a legal entity known as a corporation.
FAQ
Why would a company go from Inc to LLC?
Going from inc to LLC for a small business eliminates the risk of double taxation. When you convert an INC into an LLC, it becomes a pass-through corporation, which means that the returns are passed through to the individual members of the company.
What type of company is best for a small business?
The type of company that’s best for a small business will depend on how you want your business would be. If you want to have total control over the company’s activities, you should consider using a sole proprietorship or an LLC. But, if you’re okay with having a board of directors making major decisions, then you can opt for an Inc.
Conclusion
As you can see, INC and LLC have some common characteristics and some that are far different. But, when you’re deciding which entity is better for your business, you may need to think about the key considerations for smooth operations in the long run.
