Quick Business Tip: Understanding the Differences Between LLC vs. Inc.
Chances are you’ve seen countless business names with the letters “LLC” or “Inc.” at the end. Maybe you never gave them a second thought…until now, when you’re planning to start your own company. So what do those letters actually mean? Which type of business entity should you choose? And do you really have to tack those abbreviations on at the end of your business name?
Today we’ll tackle those questions so you have all the information you need to start an LLC or Inc. of your very own.
What Do “LLC” and “Inc.” Mean?
Simply, these are abbreviations for different business types. An LLC is a Limited Liability Company, and Inc. stands for “incorporated,” which refers to an S Corporation or C Corporation.
Business Types: Comparing LLC vs. Inc.
Now that you know what they stand for, let’s talk about how they actually function. There are three main business entities most entrepreneurs choose from when forming a company:
LLC: Limited Liability Company
An LLC is the most popular type of business entity with small business owners and entrepreneurs for a variety of reasons. First of all, it protects your personal assets. If your company goes into debt or you have the unfortunate circumstance of being sued, your home, personal bank account and other personal assets are protected and can’t be seized.
Secondly, LLCs allow for pass through taxation. This means that each owner (called “members” in an LLC) reports his or her profits on their individual tax return to avoid double taxation. This prevents having to pay taxes on money flowing through both the company and the individuals.
Inc.: S Corp or C Corp
An S Corp is another option for small business owners to choose from. Instead of members, S Corps can sell stock (unlike an LLC), so their owners are called shareholders. S Corps also provide pass through taxation that allows the shareholders to report their profits on their individual tax returns. An S Corp also offers liability protection to separate personal and business assets.
With an S Corp, the U.S. Small Business Administration advises that “any shareholder who works for the company must pay him or herself ‘reasonable compensation.’ Basically, this means the shareholder must be paid a fair market value salary, or the IRS might reclassify any additional corporate earnings as ‘wages.'” In an LLC, members don’t have to be employees with earnings. Instead, they get a proportionate share of the LLC’s profits as agreed upon in the company’s operating agreement.
A final entity option for business owners is the C Corp. This is a more structured and complex choice that is used primarily for larger companies. A C Corp is taxed at the corporate level and does not allow pass through taxation. This means that the company has to file a tax return, and the shareholders have to report their profits on their individual tax returns.
There is also a bigger difference in equity structure for a C Corp. While LLCs don’t have shareholders and S Corps can have up to 100 shareholders, C Corps can earn additional cash by selling publicly traded shares and presenting an initial public offering. C Corps also have much more structure and accountability: They are required to have a written Articles of Incorporation, they must hold an annual general meeting for the shareholders and the board of directors and there are specific assigned titles to anyone associated with the company (such as shareholder, director, employee, and officer).
Should I Choose LLC or Inc.?
If you are a sole proprietor or new entrepreneur, and you plan to keep your business on the smaller side, an LLC is probably your best bet. If you plan to grow your business to include a board of directors, you want to add shareholders and you hope to eventually expand into becoming a C Corp, then an S Corp might be the best option to grow with you.
However, don’t spend too much time stressing over this now. The entity you choose initially doesn’t have to be the entity you stay with for the life of your business. For example, if you choose an LLC at the genesis of your startup, you can always change it into an S Corp or C Corp later on down the road.
Do I Have to Include LLC or Inc. in My Business Name?
Maybe adding the abbreviation “LLC” or “Inc.” doesn’t look right on your business sign, or it doesn’t flow well with your business name. Do you legally have to add these letters at the end of your name?
Each state has different requirements, but generally speaking, you do need to add LLC or Inc. at the end of your official business name. (You can contact the office of your secretary of state to make sure.) This has a couple of great benefits:
- It gives confidence to your customers and clients that you are a legitimate, legal business.
- If someone wants to sue you, they may be deterred if they know they can’t have access to your personal assets.
Let’s say it really cramps your style to have these initials at the end of your business name. You may want to create a Doing Business As (DBA) name, also known as a “fictitious business name” or “trade name.” You’ll need to register your DBA name to create a public record of the responsible party behind the alias in case anyone needs to find out the legal name of the company behind the DBA.
If you’re ready to start your LLC, S Corp, or C Corp, Incfile has made the process quick and easy for you. Our business formation packages include a lifetime of customer support, online access to your incorporation documents and your first year of registered agent service for free. Check out our online business formation packages — starting at $0 + state fees — to form your business today.