Discussion Topic: Inc. vs. LLC in the US
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.
Spiral Medical Development
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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).
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.
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.
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.