Discussion Topic: Inc. vs. LLC in the US

Home Forums Medical Device Development Business 101 Discussion Topic: Inc. vs. LLC in the US

This topic contains 21 replies, has 22 voices, and was last updated by  cy268 2 months ago.

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  • #895

    Josh
    Course Facilitator

    Many who work on medical device projects never really get training in basic business. Those who have business degrees will find this module to be quite elementary, but it is often the case that engineers and scientists never even get this basic material and training on the subject. This is why we cover it here.

    To deal with companies it is nice to start from the beginning: what are they? This module talks a lot about that.

    For this discussion, think about a medical device company of mid-size with 50 people and $10 million in revenue. What argument would you make to have that company exist as an “Inc.” corporation versus an “LLC”?

    If you have other kinds of corporation formats in your country, such as they do in the UK, describe them here and lay out the pros and cons.

  • #4266

    zbw2
    Participant

    If you are looking to continue to build your company privately, an LLC is a good option. Because LLCs are passed through entities they are only taxed only once. Also with an LLC you get the Liability protection of a corporation without the same formalities or expenses. This is especially important as medical device companies are capital intensive. LLC introduce more versatility as owners can elect to be taxed and as a corporation.

    If the plan is to one day go public a corporation is required as, LLCs cannot issue shares of stock. This conversion to a corporation can be expensive and also requires double taxation.

  • #4270

    bb254
    Participant

    A mid-size company making $10 million in revenue should exist as an “Inc.” corporation vs an “LLC.” As an “Inc.” corporation the company would get more attraction from business owners to buy shares compared to an LLC. An “Inc.” can go public which is what venture capital companies look for rather than an “LLC.” By going public, the medical device company can make far more revenue and increase the number of workers in terms of a global scale. A corporate structure won’t allow shareholders the right to make decisions unless they are a part of the board of directors. The opportunities to expand the company beyond $10 million in revenue as an “Inc.” are far more realistic in terms of getting loans/credit.

    Reference: https://www.mycorporation.com/learningcenter/llc-vs-corporation.jsp

    • This reply was modified 2 months, 1 week ago by  bb254.
  • #4275

    asimbana
    Participant

    I agree with @bb254, if a mid-sized company is making $10 million in revenue per year, the company would generate a larger net worth if the company became an Inc corporation. As discussed in the previous discussion above, the long-run gain would be to attract shareholders to buy stock in the company and increased the overall net worth of the company, this would also allow the company to expand out of the country and gain further coverage on their customers and increase their work staff. Of course by doing so, the negative effects of doing this would be the expensive cost in doing so and taxation but since the company is larger it can generate a larger revenue. This is ideal for medical device companies since they are interested in expanding and providing many countries with medical devices to assist and meet the need of their international customer needs.

  • #4289

    thuytienlecao
    Participant

    I agree with @bb254 and @asimbana about the INC choice over LLC and would like to add more on the CONS. The biggest drawback is the double taxation (C Corp). Also, shareholders that control and own a significant amount, or majority, of the corporation’s voting stock have a dominant voice in the management of the business in comparison to shareholders that do not own as much stock. For a medical device company, it may not be great but I don’t think it’s a major drawback.

  • #4308

    merzkrashed
    Participant

    LLC protects you from the personal risks involved if a lawsuit were to arise concerning your business — safeguarding your personal assets. LLC gives flexibility in management and taxes are not paid at the business level.
    Many business owners consider taxation to be the most noteworthy difference between S corporations and C corporations. C corps are taxed as separate entities. They are also subject to “double taxation” but an S corp is a “pass-through” tax entity, like the LLC.
    So, for a medical device company of mid-size with 50 people and $10 million in revenue, if it LLC,this company Cannot issue stock,Cannot engage in corporate income splitting to lower tax liability.
    But as an INC,may issue shares of stock to attract investors, and Corporate income splitting may help lower overall tax liability, but C corp tax structure requires double taxation of corporate profits (s corp’s does not).Also, for businesses that eventually seek to issue stock, the corporation can easily issue shares while an LLC cannot issue shares.
    https://www.incorporate.com/comparing_corporations_llcs.html

  • #4311

    dbonanno1
    Participant

    For a mid-sized medical device company like you have described (50 people & approx. 10 million in revenue), there are a few benefits that a company like this could get from becoming an “Inc.” versus an “LLC”. First would be the ease associate with getting loans or credits, which get then be used to acquire more assets or even buy another company. Although an “LLC” can also get loans being recognized as an “Inc” would make it even easier to get larger loans which could help the company grow. Another benefit would be the potential to have people outside of the US invest in the company which cannot be done with an “LLC”, providing another way in which the company can raise money and become larger. As an “Inc.” you also hold the ability to go public and make even more revenue selling company stocks.

  • #4316

    alexandrabuga
    Participant

    I agree with @bb224 and @asimbana that for a medical device company of mid-size with 50 people and $10 million in revenue they should be an Inc so they have the ability to go public and spark some interest and attract investors (VCs, etc). The company should be incorporated in Delaware since they have more favorable corporate and tax laws. As @thuytienlecao mentions, the double taxation is the biggest drawback. An LLC would be more for the risk adverse, but for this situation to attract the right investors an INC. should be put in place.

  • #4319

    ec52
    Participant

    A medical device company of mid-size with 50 people and $10 million in revenue should exist as “Inc.” as opposed to “LLC”. As stated previously by others in the forum, there is a drawback of double taxation which can be important, although the benefits of going public and expanding revenue and increase workforce outweigh this shortcoming. Additional benefits of “Inc.” structure includes: a) allows business owners to use business losses on their personal tax returns and deductions, b) An S corp can provide savings on self-employment or Social Security/ Medicare taxes, and it allows owner to offset non-business income with losses from the business, and c) C corps are often preferred incorporation choice of developing business as owners can hold different types of stock interests which allows different levels of dividends. This is the one reason why venture capitalists choose C corporations when they offer funding to a business. Investors are attracted to the prospect of dividends (often higher dividends) if the corporation makes a profit.

  • #4323

    aaq2
    Participant

    A medical company of that size and revenue should exist as in incorporation vs an LLC. Some of the benefits of owning and incorporation over an LLC include the following. Corporation owners enjoy limited liability protection, and are usually not individually responsible for business debts. Also they often gain tax gains, such as writing off health insurance premiums. Even if an owner dies or sells interest, the corporation still exists. Corporation ownership can be easily transferable and capital can be raised more easily through the sale of stock. Another advantage is that many banks prefer handling loans with incorporated borrowers. Retirement funds and qualified plans, like a 401(k), can be easier to establish.

    • #4339

      dh239
      Participant

      A company of that size would need to weigh the benefits and drawbacks of both of the choices. An LLC is excellent for smaller operations at it offers protection in the form of reduced personal liability as well as reduced taxation. For a company looking to continue steady growth in its field, this is an excellent option. Becoming an Inc. opens the door to greater opportunity in terms of investors and loans, but also introduces greater costs in taxes and during the transition. If the company is not ready to embark on the journey of going public and does not have a plan to expand and attract investors, this would not be the right move. However, if the company is looking to grow and expand rapidly, and needs the aid of investors, then it is clear that an Inc. would be the proper avenue.

  • #4348

    rachelpatel1796
    Participant

    A medical device company that has 50 people and $10 million in revenue, there has to be a comparison between an Inc corporation and an LLC corporation in order to maximize all the benefits. An advantages of an LLC is that they are only taxed once and there is no personal liability. This would protect the company from any lawsuits. There is also flexibility in management. However, the disadvantages are that they can issue a stock or engage in corporate income splitting to lower tax liability.

    The advantages of an Inc are that they can expand by issuing their stock to attract investors and split income in order to lower taxes. You can also obtain better loans. The disadvantages are that they must hold annual meetings and record their minutes, have restrictions on the number of owners (S corp) or require double taxation of the corporate’s profits (C corp).

  • #4351

    akashranpura
    Participant

    When looking at choosing between an Inc or a LLC it is important to realize the necessity to pick what is best for the company. An LLC is good for protecting the business owners and will protect any personal assets. Also a LLC will provide flexibility in management. The structure of the company can vary; this is not the case for Inc. Also the taxes would be paid through the personal level not by the company. Therefore, in this case I would pick LLC because it provide freedom an Inc would be unable to.

  • #4353

    gaberuiz13
    Participant

    There a few things to consider when deciding to make a business either an LLC (limited liability company) or an incorporated company (S-corp or C-corp). With an LLC, business owners are personally protected from the risks that involve a lawsuit or other legal actions that involve the company. This way, the individual’s assets are protected unless the court finds out about any unlawful actions the owners may be undertaking in the business (“piercing the corporate veil”). Furthermore, taxes paid by LLCs are not paid at the business level; they are reported and settled at the individual level. When choosing between an S-corp or C-corp, business owners tend to look at taxation. S-corps are taxed similarly as LLCs where as C-corps are taxed as entirely separate entities, so C-corps are first taxed at the entity level and then individuals are taxed at the personal level. With a business of 50 employees and $10 million in revenue the business owner(s) should consider an S-corp since the business is not really large enough to reap the benefits of a C-corp, but not exactly small enough for a LLC to be viable. The only drawbacks to this is that S-corps won’t gain as much attention from venture capitalists, so expansion won’t be as viable as an option; however, the overall cost and savings of an S-corp from taxation at this level is something to consider.

  • #4368

    myton
    Participant

    There are many benefits of becoming a corporation over an LLC. Mainly, with the form of a corporation, it would be individually advantageous to become a shareholder of a company because of the ability to split the business income which allows for the overall tax liability to be lowered. This would be favorable because of the $10 million dollar revenue. However, because of the mid-size of the company, it would not be as favorable to turn it into a corporation, however, with its revenue of $10 million, it will surely grow and eventually, a corporation status would be favorable. Furthermore, corporations can sell shares for the company to attract more investors when expansion is required and also, the presence of the members does not affect the existence of the company. Similar to an LLC, a corporation can also have limited liability. Lastly, there is a variation between the legislation that exists that deals with LLCs and this in turn will cause more paperwork with the transferring and expansion.

  • #4377

    Scott
    Participant

    In China, the country offers Wholly Foreign Owned Enterprises. This is the most popular form of incorporation of foreign companies in China. WFOE allows an LLC company that is owned by foreign to open their company in China, usually for manufacturing purposes, without the involvement of a Chinese partner.

    The advantages include:
    – Implementation of the parent companies strategy, brand, and mission in the worlds biggest market without having to involve Chinese partners or investors.
    – The ability to carry out formal business functions without having the site act as just a “satellite office”
    – Ability to receive and remit money into Chinese currency
    – Increased protection of intellectual property overseas
    – Increased efficiency in management and operations

    The disadvantages include:
    – Lack of government support
    – Understanding the complex Chinese market
    – Since the parent company is an LLC, the the foreign funds are required to be raised for authorized capital for shareholders

  • #4397

    ao242
    Participant

    The company will be better off to exist as an “Inc.” corporation than an “LLC”, first Corporation has limited liability, so the investors and owners are not generally liable for business debts and other liabilities. While an LLC, does has limited liability but Instead, any net profit or loss is “passed through” to the personal tax returns of the owners or investors. Corporation “Inc” will make far more profit, can be publicly traded and “C Corporation” can raise more finances by issuing stock. A lot of capital could be raised and use it in further research, to add new product line etc. An LLC has to depend selling shares to raise funds and cannot be publicly traded

  • #4411

    puneet
    Participant

    I think that this company with $10 million in revenue would fare best as as INC as opposed to and LLC. For this company being able to issue shares of stocks to investors is an advantage that an LLC doesn’t offer. Lowering taxes by splitting income is another advantage this company can gain by becoming an “INC”.

  • #4413

    jlw23
    Participant

    There are a lot of interesting points made above which made it hard to make a decision. But from my research I would go with an LLC. As a mid sized company you can start as an LLC and change it to a INC later. The common advantages of an INC and LLC are-
    – Limited liability
    – No double taxation
    – Pass through of losses
    Of course if this is a growing company, as an LLC there is more flexibility for the owner on the decisions made for the company. This is the reason why I would go with the LLC just so the owners can have a say in the company operations. There is always an option to become an INC later on.

  • #4414

    tilak
    Participant

    First its important to identify the difference between an incorporation and a limited liability company. An LLC is the United States’ version of a private limited company. An LLC’s business structure combines the taxation of a partnernship with the limited liability of a corporation. On the contrast, an incorporated company is legally separate from the people who have formed it. Directors who purchase shares in the company have responsibility over its operations. In the case of a lawsuit, this limits an individuals liability. Corporations can especially advantageous because it lowers the overall liability of the company and also reduces tax for the owners. In the beginning, it would not be efficient to turn this small company into a corporation because of its size. But overtime, as it grows with its revenue it would surely be a viable option.

  • #4439

    MonicaGoncalves
    Participant

    A medical device company of mid-size with 50 people and about $10 million in revenue would exist as an Inc corporation versus and LLC. An LLC is typically a small-medium company that involves limited risk assumed by all owner and the ownership is based on the amount each partner invests initially. Managing members are almost considered like a partner in a LLC company. For this medical device company of about 50 people I would not go with the LLC option but rather a corporation would be beneficial to the company. As a corporation the company can go public and sell stock and have investors that invest money in the growth of the company. I would also think the a partnership would also be beneficial to the company because then the ownership of the company can then split responsibilities, less risk on each owner, more funds and more minds to help the company develop.

  • #4445

    cy268
    Participant

    Two of the similar type of US corporation structures that can be compared with to Indian corporations are the LLP and C-Corp. The pros of an LLP in India are:
    1. Corporation need not be terminated in the death of a partner
    2. Other partners in the company are protected from the consequences of actions of another partner.
    C-Corps of US can be compared to Private Limited type of corporations in India. One of the pros of Pvt. Ltd. In India is it allows investors to exit the company without being liable for company affairs.

    • This reply was modified 2 months ago by  cy268.

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