If you’ve made the decision to incorporate your business, you’re off to a great start (More on that in our last blog). But before you can even move forward with THAT, you’ve got another big decision to make — whether to incorporate as an LLC or INC. This “starting a business” thing isn’t going to be easy, is it?
We’ll do what we can to help. Let’s talk about how to choose one of these three-letter designations, and how that decision will impact your business in the long run.
First, the basics. INC is just what it sounds like — an abbreviation for Incorporation. So what does LLC stand for? That’s a “Limited Liability Corporation.” If you’re familiar with the advantages of “incorporating” (a general term that covers both the LLC and the INC), that may sound redundant, as the primary purpose of any incorporation process is to reduce the liability on the shoulders of the business owners. It’s true — in fact, the INC was once the only viable option provided by the State for designating a separate legal entity from the individual people running the business. But the LLC goes a step further — it’s set up to make things simpler, particularly for small businesses.
Here’s a few of the ways your decision between an INC and an LLC will impact your business:
Who calls the shots?
An LLC has Members and Managers. An INC has Shareholders, a Board of Directors and Officers. The greater hierarchy in the INC means more paperwork, but more possibility for varying levels of company ownership.
What do the rules look like?
An LLC is controlled by an Operating Agreement. An INC runs according to Bylaws + Minutes. An “operating agreement” is a simple series of declarations that clarify certain possibilities that may arise as the company grows and changes. Bylaws and minutes go to extra lengths to ensure a series of checks and balances can be carried out by all levels of ownership.
How do you file your taxes?
An INC can be filed as an S-Election or a C-Election. An LLC can be filed as either of these, but also adds the options for filing as a Sole Proprietorship (for one owner) or a Partnership (for more than one owner).
Who’s got skin in the game?
With an LLC, the employees are just that — they don’t have a stake in the company unless they are or become “Partner”. In an INC, on the other hand, there’s room for any number of Passive Investors to join your ranks, as well as numerous Partners at varying levels of control and ownership.
These are just a few of the many differences between an LLC and an INC. As you can see, this is a decision that will have a lasting impact on the way the government looks at your company and the way you do business. So take your time. Talk to your business partners. Get an outside perspective.
And finally — as always — don’t hesitate to consult a legal professional for expert advice.
Tags: Entrepreneurship, Incorporation, Startup
