An LLC, or limited liability company, is a legal business entity you form to protect your personal assets from liability. It will also establish how your business income is treated come tax time.
What are the differences between an LLC and a Corp?
These two business entity options have some similarities and, of course, differences. Choosing between the two will depend on your business type and needs and your own liability and tax planning goals.
An LLC is typically either owned by one person or a small group of co-founders. But technically, an LLC doesn’t have “owners”; it has “members.”Meanwhile, an Inc. effectively belongs to the people who hold shares in it, and the company management is accountable to those shareholders.
One reason why making your business an LLC is worthwhile is because, as the name “limited liability company” suggests, it creates a barrier between the business activity and the member’s personal assets from a legal standpoint. That said, an Inc. pretty much offers the same liability protection that an LLC does, especially for an Inc. owned by one person or spouses.
One of the common issues discussed when deciding between an Inc. or LLC is the amount of paperwork hassle you have to undertake.Generally speaking, LLCs indeed have less paperwork, particularly because it doesn’t have to hold “annual meetings” of the directors and take meeting minutes.
Tax savings used to be the most important deciding factor between an Inc. and an LLC. Oddly, since both can be classified as C corps and S corps for tax purposes, they can be pretty much the same.
Just as independent contractor taxes are applied on the basis that this is personal income, the same status is relevant if you generate income from an LLC as a sole owner. In plain English, a single-member LLC does not have to do a tax return.