LLC and INC. These letters stand for two ways to designate your business as an entity separate from yourself. “LLC” stands for “Limited Liability Company”, and “Inc.” or “corp.” refers to a corporation. Both designations protect business owners from financial liability, separating personal assets from business assets. But if you’re thinking of either forming an LLC or incorporating your business, what you really need to know is how these designations differ. We’ve outlined the three major ways that they are different: their requirements for ownership, their management structure, and how they are taxed.

Limited Liability Company

women and men in business suits sitting at a table, one woman standing up shaking the hand of a woman sitting down. — *Each LLC member owns a designated percentage of the company*

Ownership

Owners of an LLC are called members. Each member owns a designated percentage of the company, which is decided upon during the LLC formation process and written into the operating agreement. This step is especially important if one member owns a larger or smaller percentage of the company than the percentage of their initial investment.
Membership in an LLC may be difficult to transfer, meaning you can’t easily back out of owning a part of the business. This depends on what has been written into the operating agreement. In some states if the operating agreement does not specify membership annulment, the company must be dissolved if a member wishes to leave the LLC.

Management

LLCs allow for flexible management. They can be managed by its members, or by an outside group of managers, which is often overseen by investors.

Taxation

Many business owners prefer the tax structure of LLCs, which allows them to report business income as personal income on tax returns, using self-employment tax forms. As we will see, this is in contrast to the way that owners of corporations are “double taxed.”

Corporation

laptop open with stock market scale on the screen. — *Inc “owners” are people who invest in the company by buying stock.*

Ownership

In a publicly traded corporation, “owners” are people who invest in the company by buying stock, or shares, of the company. Investors, and owners, are referred to as shareholders. It is up to the corporation to determine how many shareholders are invested in the business. Some corporations, after meeting national regulatory requirements, can opt to have publicly traded shares. This is an opportunity to increase their capital by gaining investors from the general public. For example, Google is a publicly traded corporation, and they have nearly 15,000,000 shareholders invested in their company.
Corporate shares are easily transferred from one owner to another, which makes incorporating a good choice for a company that anticipates having outside investors.
Owning a share in a publicly traded corporation does not grant full rights. Many economic theorists argue that the entrepreneurs and chief executive officers are the true owners of a corporation, despite the title of ownership going to shareholders.

Management

Corporations require a board of directors to oversee the organization, and officers within the board to manage day-to-day affairs and operations. The rights and responsibilities of the directors, officers, and shareholders are spelled out in the corporation’s bylaws.

Taxation

Corporations are taxed as “C corporations”. They pay standard federal income tax on profits, and shareholders also pay tax on dividends received. Owners of a C corporation are essentially subject to double taxation, since they pay personal taxes on dividends as well as corporate taxes on profits.
Corporations that have fewer than 100 shareholders can avoid double taxation by filing taxes as an “S corporation.” S corporations are known as “pass-through entities” which mean that the corporation’s net income passes straight through to the owners and shareholders. The corporation itself does not have to pay federal income tax; shareholders are taxed on the income they receive from the corporation.

Which is best for you?

There’s a lot to take on board if you’re considering forming an LLC or incorporating a business. Which one is best for you depends on your plans. Take into consideration that LLCs:

are a newer concept.
allow for more flexibility in management and operations.
are only recognized nationally.

While corporations:

have a standardized and rigid management structure.
have a longer history which can offer legitimacy to your organization that is desirable for outside investors.
are recognized internationally.

Both LLCs and corporations must follow the laws of the state where they were formed, and each state has their own rules about LLC and Inc. dues and fees, record-keeping, and reporting to the government. It’s important to consider all of your state requirements, your business plans, and future goals before deciding on which type of business entity is best for you.

Learn from Those that Came Before

With all the small business ideas out there, we live in a wonderful time of innovation, but that comes with its own risks. Whether you’re wanting to sell produce and flowers in a farmer’s market or opening up your own electronic repair store, it’s good to be aware of the pitfalls with running your own business. Don’t make these business owner mistakes.

1. Failing to Organize & Budget

Like anything, organization will set you free. When starting a business on the ground floor, having a clear plan with SMART goals can not only keep you going in the right direction but also help keep stress down.

*These time-honored plans will help keep you on the path to success.*

This also involves keeping clear notes on your goals and setting intentions, especially with a budget. With all of the clarity, you should have little to no mistakes during the start-up period by sticking with your business plan.

2. Skipping Research on the Market (Knowing Your Customer)

It’s not the most fun aspect of business running, but it is a necessary one. The market is your influx of customers and money, so you can’t ignore its heartbeat or where it flows. Researching what’s happening in the market will give you first-hand knowledge, making you one step ahead of those who do not.

A secondary aspect of this is knowing your customer base, a part of the market. Knowing exactly what they want and how it pertains to your goods/services can keep your edge. For example, if you sell sandwiches and your market research shows a new type of cheese coming out, buying the cheese and utilizing it in your store can give you an edge over your competitors.

And you would never have known if you hadn’t looked into it.

3. Not Taking Advantage Of Technology

While the solidity of hard copies can’t be forgotten, technology has come far in contemporary times, assisting us in many trivial tasks. Also, in our screen-drenched world, your business could be disregarded for not having a website or having a mobile presence. Yes, this means social media too.

Software for businesses is a relatively cheap expense. If you want to do your own accounting (which you can, but don’t skip this either), there are programs available to secure all the numbers in their places. Other software can be useful from tax preparation to advertisements. Would your business type benefit from an e-commerce store; if so, think about which host websites are available. This is the most costly of business owner mistakes.

business desk full of technology — *With all the tech available to you, it’d be silly not to at least take a look.*

4. Forgetting Paperwork

Simply put, cover yourself. The amount of paperwork can be staggering, but it is a necessary part of the business world. Don’t forget to sign all your agreements and keep receipts in case something comes up later.

5. Undervaluing Yourself

Along with market research, you’ll see the average cost of your goods/services. When new businesses start, they can assume they’ll start in a novice category. While true for some, it may not be the same for all.

Make a fair market price for what you provide so that you can maintain a solid profit margin. Adjustments may come, so be ready for those as well.

6. Spending Too Much Too Soon (Or Too Little)

Debt becomes a big problem over time, but business loans are known to be a popular first choice. Your starting capital needs to stretch to cover everything you need starting up. Again, referencing the goals from earlier, you should be able to attain them and keep within budget. Just make sure not to stretch yourself or make large personal purchases using your company account.

The same can be said about spending too little. If you don’t maximize your starting capital, you risk lessening your impact on the market and thus falling behind from the get-go. There is always a risk, but make sure these risks are calculated.

7. Not Planning for Hardship

Hard times fall on us all, and businesses are no exception. Whether it’s an unforeseen accident, theft, or illness on the team, you’ll want to be prepared for it. Insurance can definitely help with this, but also keep a savings account with enough money set aside for the interim. For more information on types of insurance, look at our easy guide here.

This way, when hardship falls on you, you can rest secure with the knowledge that you can see it through, and your business will continue to thrive.

8. Going it Alone

We’re a communal species, and this goes into the intricate dealings of a business. You’re not alone in the market so you shouldn’t be alone in your company. If you work alone and are comfortable with that, of course, it’s okay, but when it comes to managing more complex matters, don’t make the mistake of not asking for help or advice.

money graph to show success — *Use your knowledge and organization to take secure steps in your risks. It’s about balance.*

Hiring others when needed and delegating is the start of a strong team. Don’t forget that by working together, we can achieve loftier goals than apart.

This can be done with small hires like a personal or virtual assistant, hiring agents for insurance, or even seeking financial advice from experts.

Successful business owners learn all these things, from organizing to teamwork. As long as you take it one step at a time, you should have little problems navigating the business world, and you won’t fall for these business owner mistakes.

EZ.Insure is there to make sure you’re not alone. Your agent will answer any questions you have, compare different plans for you, and even sign you up when you’re ready, free of charge and without having to worry about being hounded by endless calls. To get started simply enter your zip code in the bar above, or you can speak to an agent by emailing [email protected], or calling 888-615-4893. EZ.Insure makes the entire process easy, and quick.

Tag: management

LLC vs INC – What’s the difference?