Is an LLC Incorporated or Unincorporated
When starting a new company, you would want to outline the business structure you want to follow. Some of those areas that'll guide your selection are management, cost, liability, tax payments, and many more.
Several business types have distinct business structures. LLC is different from sole proprietorship and Corporation. However, LLC still has some common features with other business structures.
It is therefore important to know if an LLC is incorporated or not. In this blog post, you'll get to understand what incorporated and unincorporated business is.
What is a Sole Proprietorship?
Sole Proprietorship is a business owned and managed by an individual. As such the individual gets all the profits and losses from the business to himself. Sole proprietors are responsible for the payment of tax and are responsible for paying debts from the business.
What is a Partnership?
A partnership business involves two or more people who come together to run a business. They share the business profits and losses and each individual is required to pay employment tax and pay off debts incurred by the business.
What is a Corporation?
A corporation on the other hand is a separate legal entity that has been registered by the secretary of state. It's an advanced business structure when it comes to management, cost, paperwork, and many more. Corporations have limited liability in that their shareholders aren't liable for the business debts. However, the business in its name pays off debts whenever it incurs one.
What is an LLC?
LLC is also a separate legal entity that can be owned by one or more persons. It has more flexibility in terms of management, paperwork, and cost when compared to corporations. LLCs also have limited Liability and they are registered with the secretary of state. Even though LLCs aren't a complex business structure, they still enjoy more benefits like corporations.
Sole Proprietorship and Partnership are unincorporated businesses while corporations are incorporated. Is LLC an Incorporated or Unincorporated business?
Incorporated vs Unincorporated Businesses
Incorporated and Unincorporated businesses differ from one another in terms of cost, liability, taxes, paperwork, and many more.
As an incorporated business owner, your personal assets are being protected. Even when your business owes a debt, your assets cannot be claimed by the lenders or creditors. On the other hand, an unincorporated business isn't protected from liability. In such cases, a lender has the right to claim your personal assets and savings if your business isn't able to meet up with the payment of debts.
Apart from that incorporated businesses are eligible to pay fewer taxes with tax deductions whereas unincorporated ones cannot. Generally incorporated businesses are more susceptible to more paperwork because of their business structure. For an unincorporated one, you could expect less paperwork.
LLCs have limited liability like corporations but when it comes to taxes, they aren't considered as a separate entity by the IRS.
Advantages of Incorporating Your Business
Here are some advantages and incorporating a business.
Limited liability
Owners of incorporated businesses cannot be sued if the business itself incurs debts. The personal assets of its owner are protected so no organization or individual can sue an incorporated business owner. Rather the business is treated as a separate entity that should be liable to pay off its debts.
On the other hand, incorporated businesses are not protected from liabilities. Once such a business experiences debts, the owners of the business can be sued by their lenders.
The limited liability associated with incorporated business is one main reason many people venture into it.
Tax Deductions and Considerations
Incorporated businesses are known to enjoy more tax benefits than unincorporated ones. Firstly they are considered as a separate legal entity by the IRS which makes it possible for the business to be taxed directly.
Apart from that, they are susceptible to fewer tax burdens than the other business types. Overall incorporated businesses enjoy more benefits when it comes to taxes.
Separate identity
With an incorporated business, you have your personal identity separated from the business. As such your business can be treated distinctly in its own terms. As such the business gains more Credibility from customers, lenders, suppliers, etc.
Perpetual existence
Incorporated businesses have perpetual existence in that the death, sickness, or retirement of a shareholder doesn't stop the business from operating. The business can be passed down to the family generations or sold when necessary but unavailability of an owner cannot stop the business from existing.
Just like there are legal actions taken during corporation formations, there are also steps to dissolving.
Access to Funds
With this type of business, funds, and capital can easily be accessed. This can be achieved through selling stock and various other means. Moreover with incorporated businesses, banks, suppliers, and creditors will be more willing to sign deals that will generate more funds for the company.
Disadvantages of Incorporating Your Business
Here are some disadvantages of incorporating a business
More Paperwork
Much paperwork comes with incorporating a business. Even after Incorporation, necessary filings and records must be done to keep the business moving. Time and resources are also required; you'll need to ensure that the business is kept organized.
Cost
Although the cost of incorporating might differ by state it’s a major requirement. Even after company formation, you'll still be required to pay some maintenance fees. If money is a major issue as a startup, then you might want to consider registering as an LLC.
Is an LLC Incorporated or Unincorporated?
An LLC also known as a Limited Liability Company is an unincorporated business structure. Although LLCs are considered separate legal entities by the state, they still don’t enjoy the separate tax structure of an incorporated business. As such taxes are deducted from the personal income of members and not directly from the business.
Even though LLCs are known to be unincorporated businesses, the business offers a limited liability that enables member’s assets and properties of the owners to be protected from business debts or risks. We can say this is a unique advantage to the LLC as many other unincorporated businesses do not enjoy this.
LLCs are thus taxed as pass-through entities when it comes to taxes meaning that the business profits, losses, and tax are reported on the owner’s income rather than the business entity itself. Moreover, LLC tax payments are also flexible to an extent as they can also choose to be taxed as a corporation if they wish. Necessary filing, agreement, and documentation must be done however to do that.
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What are the Similarities between a Corporation and an LLC?
LLCs and Corporations maintain some similarities. it is essential to understand the similarities that exist between the two business structures.
Separate Legal Entity
If you prefer that your business is set up as a legal entity, then both an LLC and a Corporation offer this feature. Once you form an LLC or Corporation, Your business is identified as a separate legal entity and thus treated as one.
Upon the formation of a corporation, your business name carries Inc., which is the short abbreviation for incorporated while that of a Limited liability company carries LLC. Having either of the two abbreviations on your business name shows that the business is now a legal entity, distinct from its owners or founders.
Similar Formation Processes
The processes, steps, and requirements for the formation of both entities are quite similar. Both LLC and Corporation require that you file a document with the secretary of state once you decide to form a business. Although the formation has to be done in the particular state where you wish to start the business, however, the filings and documentation must be done if you choose to open either of the business structures.
Apart from that during the formation process, both the LLC and Corporation are expected to provide a document that explains how the business operations will be carried out and managed.
LLC files a document called the article of organization while the Article of Incorporation is being filed by the Corporation. Both documents provide details about the business, including the owner's name and address, the purpose of the business, the company’s official address, information of the directors or managers, organizational structure, registered agents information, and many more.
Limited Liability
Most start-ups prefer to open an LLC or Corporation because of the limited liability associated with them. As explained earlier, both business structures have a legal entity that enables creditors to charge them separately when a debt is incurred. As such the shareholders’ and members’ assets are protected.
Although this limited liability advantage is much recognized with LLCs and Corporations, there are some instances when the shareholders or members could be held responsible for the company’s liability. If the company owners go against the rules of an operating agreement, for example, they could be held responsible for their wrongdoings.
Moreover, there is a legal term called piercing the corporate veil. With this, shareholders and members can be held liable for the company’s debts. In the court, veil piercing is used to disregard the separate legal entity of LLC and Corporation, and as such owners of the business are liable for the business debts and activities.
Several factors could bring about piercing a corporate veil, some of which include mingling the business assets together with the owner’s personal assets, mismanagement of business funds, failure to follow the operating agreement, failure to make adequate annual filing and pay the necessary fees, and so on.
In all both the LLC and Corporation are well respected with the limited liability benefits and so far they have not breached the state's rules, regulations, and their agreement, they will continue to enjoy this feature.
Registered Agents
Whether you choose to form an LLC or a corporation, it is necessary to appoint a registered agent in your state of business formation. A registered agent is an entity that receives proceedings, notices, and other legal documents from the state on behalf of your business. They must be physically present and available during business hours in your state of business formation.
Both LLC and Corporation are therefore required to have a registered agent during business formation.
Post Formation Compliance
Both the LLC and Corporation have rules and obligations they must abide by even after the company formation. Once you’ve formed your organization, either LLC or Corporation, you are expected to file an annual report, pay franchise tax, etc. to remain in good standing.
An annual report is a document that provides information about a company for a year. The information includes the company name, official company address, name and address of shareholders and directors, and many more. A franchise tax on the other hand is a fee paid to the state that allows LLCs and Corporations to exist and gain all the advantages of being one.
Record Keeping
Whether you wish to form an LLC or a Corporation, keep in mind that both require adequate record-keeping and organization. Documents like tax returns, members lists, and agreements, governing and management documents have to be kept up to date and every member, director, and shareholder has the right to review the document when deemed fit and follow the right procedures.
What are the Differences between a Corporation and an LLC?
Here are the differences that exist between LLCs and corporations.
Tax Payment Term
While Corporations are taxed as a separate legal identity, LLCs are taxed as pass-through entities. This means that in an LLC, individual shareholders report expenses and income on their tax return rather than the business itself. Usually, the IRS disregards LLC when it comes to tax payment and structure and thus they are not treated as a separate entity.
Management Structure
When it comes to management structure, LLCs are quite different from corporations. Corporations are expected to hold annual shareholders meetings, hold directors meetings, provide notices, and many more. In terms of selecting a director, an LLC member can also be the director of its business or all the members come together to appoint a director.
As for corporations, the director has to be a natural person and not any of the shareholders. Overall, LLC is flexible in terms of its management processes and doesn’t require many meetings like a Corporation.
Frequently Asked Questions
Can I change from an LLC to a Corporation?
Yes, you can change from an LLC to a corporation. Most states would allow you to make these changes by filing the necessary documents.
Can my LLC have Unlimited Life?
Yes your LLC can have an unlimited life. Recent updates have been made by states to allow LLCs to choose a perpetual existence for their time of dissolution when forming their company.
Can my LLC be taxed as a corporation?
Yes, you can have your LLC taxed as a corporation. However, you'll need to file form 8832 with the IRS.
Conclusion
LLC remains one popular business structure that every startup wants to form because of the flexibility and benefits that it offers. Although an LLC is not incorporated, there are many similar advantages that it shares with a corporation. Do have any questions regarding LLC business structure? Kindly contact an expert here to speak with you.
