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By Jacinta Sherris
Published on 13 Apr 2023 4 min read
When running a small business, knowing how to structure your company is crucial. There are several different options available, but two of the most popular are incorporation and Limited Liability Company. Both structures have their advantages and disadvantages, so it can be difficult to decide which one is the best for your business. Keep reading to find out how Inc. vs LLC taxes work and how to know which one is best for your business.
Understanding an LLC and an Inc.
An LLC, or a limited liability company, is a flexible and relatively simple business structure that offers protection of personal assets. In an LLC, owners are referred to as “members” and have limited liability for any debts or liabilities incurred by the company. This means that personal assets, such as a home or car, are protected if the company faces any lawsuits or financial difficulties. Another advantage of an LLC is that it offers pass-through taxation, meaning that the profits and losses of the company are reported on the owners’ personal tax returns.
On the other hand, an Inc., also known as a corporation, is a more complex business structure that also offers limited liability protection. In an Inc., owners are referred to as “shareholders” and have limited liability for any debts or liabilities incurred by the company, meaning personal assets are protected. One of the main advantages of an Inc. is that it offers a clear separation between the owners and the business, making it easier to raise capital and transfer ownership. In addition, the owners of a corporation can sell stocks or shares to raise funds, this is not possible in the case of an LLC.
Inc. vs LLC: Taxes
One significant difference between an LLC and a Corporation is how they are taxed. LLCs are known for their pass-through taxation system, which means that profits and losses are passed directly through to the owners’ personal tax returns. In contrast, corporations are taxed as a separate entity, paying taxes on their profits at the corporate level and on any distributions to shareholders. While this can result in higher taxes for corporations, it may offer some benefits in terms of deductions and other tax-related issues.
Another factor to consider is the tax rate. The corporate income tax rate for a C corporation ranges from 15% to 21%, depending on the amount of taxable income. In contrast, the LLC owners will pay the individual income tax rate, which ranges from 10% to 37%, depending on their total income. It’s also important to note that the tax rate for an LLC can vary depending on how the entity is classified by the Internal Revenue Service (IRS) for tax purposes.
One potential advantage of a C corporation structure is that it may allow for more tax deductions and write-offs. However, LLC owners can also take advantage of business expenses and deductions. In either case, it is important to keep accurate records and consult with a tax professional to maximize your tax savings.
Other Differences Between an Inc. and an LLC
Although an Inc. and an LLC vary considerably when it comes to taxes, there are also differences in other key areas.
Flexibility
One major advantage is the flexibility that an LLC offers. Fewer formalities need to be followed, such as holding shareholder meetings and keeping detailed corporate records. Additionally, LLCs can be owned by individuals, corporations, or other LLCs, allowing for a wider range of ownership structures.
Management Structure
Another major difference between LLCs and Corporations is their structure and management. LLCs offer a simpler, less formal structure with fewer legal requirements for compliance, making them an ideal choice for small businesses or sole proprietors. Corporations, on the other hand, have a more complex structure with more stringent requirements, including a board of directors and formal meetings. This structure can offer more protection for the owners and may make it easier to secure funding or invest in the business.
Liability
Incorporation provides the highest level of protection as it creates a separate legal entity. This means that the company has its own assets and liabilities, and shareholders are not personally liable for the debts or legal obligations of the business. On the other hand, an LLC also provides liability protection, but it is not as comprehensive as incorporation.
How to Determine the Right Business Structure for Your Needs
When deciding between incorporating or setting up an LLC, consider the pros and cons of each. Incorporation provides more structure and protection but can be more expensive and have more regulations to follow. On the other hand, LLCs are more flexible and have fewer regulations to follow, but may not be the best choice for businesses seeking substantial investment or a formal corporate structure.
When deciding which structure is best for a small business, several factors should be taken into consideration, including the type of business, the size of the business, and the long-term goals for the business. When in doubt, it may be helpful to seek out professional advice or collaborate with a tax expert.
Launching an Inc. vs LLC
Selecting the best business entity for a small business is a complex process that requires weighing the pros and cons of incorporation and LLCs. Business owners should carefully consider the short and long-term implications of each structure before deciding which is most beneficial for their individual business.
Once you’ve decided which business structure to move forward with, partner with doola to help you seamlessly launch your new business structure. The doola platform is the one-stop shop for all resources for launching and growing your businesses, including business banking, business entity formation, bookkeeping, and so much more.
FAQs
What is the difference between an Inc. and LLC for taxes?
An Inc. is a corporation and an LLC is a limited liability company. An Inc. is subject to double taxation, with income taxed first at the corporate level and then again at the shareholder level. An LLC is treated as a pass-through entity, meaning that income is only taxed once at the individual level.
Are there any advantages to forming an Inc. or LLC?
Yes, forming an Inc. or LLC offers certain advantages, such as limited liability protection, potential tax savings, and more flexibility in how profits are distributed.
What type of taxes does an Inc. or LLC have to pay?
An Inc. is subject to double taxation on its income, while an LLC is treated as a pass-through entity and only pays taxes on its income at the individual level.
Are there any tax incentives available for Incs or LLCs?
Yes, there are a variety of tax incentives that may be available to Inc.’s and LLCs, such as deductions, credits, and other tax savings.
Can I switch between an Inc. and LLC structure?
Yes, depending on the situation, it is possible to switch between an Inc. and LLC structure. However, it is important to consult a tax professional for the best advice on the best structure for your business.
