What Does Inc Mean?
Understanding what the term inc. means can help you choose the right entity when starting your business.11 min read
Understanding what the term Inc. means can help you choose the right entity when starting your business.
What Does Incorporated Mean in Business?
Before you begin your small business, it's important that you decide what kind of legal structure it's going to have. What type of legal structure you have depends upon the actual business you have, how many investors there are, and how tax issues, as well as liability issues, are dealt with best. In the beginning, you can structure your business however which way you want so that it functions in the best possible manner.
If your business becomes a corporation, there are a lot of benefits that happen as a result. The best one, however, is that the business will then become separate from you, the owner, which means you will essentially have a legal shield should things go awry in the future. If and when your business does become incorporated, it will most likely have one of the following after it's title:
What Is Inc.?
Inc. stands for incorporated, and if your business is incorporated, that means legally it is a completely separate entity from the people who formed it. People will buy shares of your company and will then have a say, as well as a certain amount of responsibility, in how it is run and operated. The great thing about being incorporated is that a member's liability is drastically lowered should the company be sued or go into default. Therefore, it is the company's responsibility to settle its debts, pay its taxes, or, should the need arise, sell stocks to raise money.
Should the owner or a member die, the company itself does not perish — it continues. To form an incorporation, an application must be filed with the secretary of state, but even though there are many benefits to being a corporation, legally, they are more complex to manage and run. For this reason, the Small Business Administration recommends that businesses do not become incorporated until they have grown significantly in size. Once a business is considered a corporation, most states require that a designation is added after their name, such as Inc.
What Is Ltd.?
Occurring more frequently in Europe and Canada than the U.S., another option for your company is to be a limited company (also known as a Ltd.). In this kind of a company, as long as everything runs within the law, owners, shareholders, and directors only have a ‘limited' liability should the company fall into debt. Directors still have to pay an income tax, and the company is also taxed on profits (thus profits are effectively taxed twice. That said, directors, are only responsible for the actual amount they have in the company. Sometimes, a shareholder's liability is determined beforehand in mutually agreed upon amount. This is known as a “private company limited by guarantee,” and the shareholders in these situations are referred to as ‘guarantors.' Some states within the United States will allow an LLC company to have a limited company title.
What Is Co.?
Co. stands for company, and generally refers to any group of people who work together via an industrial enterprise. Examples include LLCs, corporations, and sole proprietorships. The Co. doesn't really carry any legal meaning by itself. Further descriptions are necessary to determine what kind of legal structure the business has.
What Is LLP?
Standing for limited liability partnership, LLP legal structures are typically used by lawyers, doctors, dentists, therapists, etc. The drawback to being an LLP is that the owner, or sole proprietor, is not protected from his or her own missteps or negligence.
What Is LP?
A limited partnership (LP) must have active managers and limited partners to be considered an LP. The drawback to this legal structure is that it doesn't protect general partners from personal liability if and when the company falls into insurmountable debt or it has a court case brought against them.
What Is LLLP?
A limited liability partnership (LLLP) is more or less the same as an LP (see above), but it does offer general partners liability protection. The drawback to choosing this legal structure is that legally speaking, it is rather complicated to maintain and run.
What Is GP?
General partnership (or GP) does not have any liability protection for its partners. Instead, partners are responsible for the actions of each and every other partner in the company. As a consequence, becoming a partner is usually much more difficult and will take years of dedicated service.
What Is a Sole Proprietorship?
Sole Proprietorship (or DBA, which stands for doing business as) is, perhaps, the riskiest of all legal structures because there is no liability protection. Legally it's very easy to get set up and to run (not to mention inexpensive), but of all legal structures, it is the least recommended by lawyers.
What Is Limited Liability Companies (LLCs)?
Where a sole proprietorship is the least recommended legal structure to adapt for your company, an LLC is the most recommended, which may be surprising because it is the newest legal structure to enter the scene. Created in the 1970s, it took a few years for most states within the United States to accept. Slowly it became the go-to choice for corporations by 2005 because of the protection it offers its members.
LLCs are owned by members, but can be run by either outside managers or the actual members. Therefore, it is a very fluid type of company structure to adopt. All members need to do is decide how they want their company to run, write it up into an LLC Operating Agreement, and then everyone signs it. From then on, the LLC is free to operate how it sees fit.
The Series LLC
A variation of the LLC, the series LLC, is an LLC that will protect assets from affecting other assets. This is useful should a company come under legal troubles because it will prevent it from losing all its assets in one go.
What Is a Corporation?
A corporation is a type of legal structure that allows it to essentially be viewed as a person, legally speaking. This means that it pays taxes, can begin legal actions if necessary, and, likewise, be sued by third parties. This is done to protect the shareholder's personal assets from liability. Should the company lose a court case, shareholder's will only lose the money they have invested in the company itself.
How to Form a Corporation
Corporations are considered people under state law these days. Therefore, the states themselves have a large role in how corporations are formed, meaning the guidelines are different for each state. The main shareholders/founders of the corporation must file with the secretary of the state. If it is accepted by the secretary, the newly formed corporation must have a legal structure abbreviation or acronym added after its name, such as LLC or Inc. The only reason this is done is so that people doing business with the corporation know, and is thus considered a type of legal disclosure right from the onset before any business takes place, paving the way for any legal issues that may arise in the future.
Benefits of Corporate Form
Corporations can exist as long as they want, regardless of who is running it. People can step down, management can be shaken up, presidents can come and go, it doesn't matter. In addition to being immortal, corporations' shareholders are protected from personal liability. They are only responsible for as much of the money they have invested in the company. Whatever the company does or how much debt it has, shareholders would only ever lose what they have put in. However, if they knowingly and willingly do something wrong or illegal, they are then fully personally liable, so whatever assets they have, personal or otherwise, are fair game in court.
Lastly, corporations are not taxed as highly as individuals, but there are some disadvantages to that.
Disadvantages of Corporate Form
Because of how corporations deal with their taxes, they are essentially taxed twice. It pays taxes on any profits it makes that fiscal year, but those very same profits are extended to shareholders/stockholders through by way of dividends. The shareholders must, in turn, reflect that as part of their personal income when they do their personal taxes, which is how corporate earnings are more or less taxed two times in a fiscal year.
Other Entities to Know: Close Corporation
Close corporations are a variation of regular corporations, but they are not required to have a board of directors and are only allowed a set number of stockholders. In the past, this option was mainly used by small, family-owned businesses. This option is rarely used these days because most small businesses elect to go with the LLC option instead.
Other Entities to Know: S Corp and C Corp
Both legal structures are basically the same; however, there are some minor differences at the federal level when paying quarterly taxes.
Other Entities to Know: B Corp
This is a B-Lab tax structure and is available for philanthropic organizations that are concerned more with making positive changes in communities than they are with making money.
Other Entities to Know: Public Benefits Corporation
A public benefits corporation is a for-profit corporation that is more concerned with helping the public than it is anything else. This legal structure was created so profits could be given away without shareholders suing the company.
Other Entities to Know: Not-For-Profit Corporation
Created for charities and private foundations, these corporate entities do not have any stock (but are run by a board of directors) and can apply for a tax exemption status. Any donations it receives are tax deductible if it is an IRS 501(c)(3) corporation.
Other Entities to Know: Statutory Trusts
Governed by a Trust Agreement, it is a corporation that has trustees and beneficiaries, also known as business trusts.
Inc. vs. LLC
LLCs are useful for small businesses that need limited liability for its members. The company is a separate legal entity and is not completely linked to its owners who cannot be sued for its actions or any debt incurred. Inc. also offers the same kind of legal shield, but it must meet structure and ownership rules. There are also numerous governmental regulations an Inc. must follow, and there is a specific way it must deal with its taxes, profits and/or losses.
Inc. vs. LLC: Comparison — Advantages
If an Inc. needs money, it can sell stocks and it can split any income it brings in to lower the amount of taxes it has to pay.
LLCs don't have any limit to the number of owners that may be members, but any profits or losses must be dealt with on the shareholders' personal tax returns. But as far as the IRS is concerned, there aren't any book requirements.
Inc. vs. LLC: Comparison — Disadvantages
An Inc. is taxed twice. Once through corporate profits and another through dividends shareholders receive that are paid through personal tax returns. Another drawback is that it must hold meetings once a year and record specifically what was talked about.
LLC drawbacks are that they cannot lower their tax liabilities through income splitting, and LLCs are unable to sell stock to raise money.
Inc. vs. LLC: Comparison — Suitable For
Large companies benefit the most with an Inc. legal structure, whereas LLCs are more compatible with smaller businesses who don't have a lot of shareholders/members.
Inc. vs. LLC: Comparison — Formation
LLCs have what is called an Articles of Organization and an Operating Agreement that are written and signed by the members themselves. The agreement is an agreed upon contract by every member that specifically outlines how the company is to be structured and what will happen in specific scenarios.
An Inc. has what is called an Article of Incorporation. This document outlines what the purpose of the organization is, where it will primarily do business, and the amount and types of stock they will have. There is a fee that must be paid upon registering that can be anywhere from $25-$1,000.
Inc. vs. LLC: Comparison — Management Structure
An incorporated business, or Inc. business, will typically adopt the following structure:
- The shareholders own the corporations stock
- The shareholders elect a board of directors
- The directors appoint officers such as the president, treasurer, secretary, etc.
- The officers handle the daily operations of the company
When a business is structured as a limited liability company or LLC, the company's owners are referred to as members rather than shareholders. Rather than appointing officers, the LLC's members will appoint what is known as managing members. This can be one member, a select few, or all of the members of the company. They will act in a similar way as the officers of a corporation and are responsible for the daily operations of the LLC.
The members of a limited liability company may also choose to hire outside individuals to manage the company for them. In either case, managers will typically serve for a set term and are allowed to serve the company at the members' discretion. This is also sometimes referred to as a "Two-Tiered Management" structure.
Inc. vs. LLC: Comparison — Taxation
Inc.-structured companies are subject to a phenomenon known as double taxation. In simple terms, the company is taxed based on revenue generated, and the shareholders are then taxed a second time based on income received from the company. Limited liability companies are not subject to double taxation. Rather, taxes involving the company's profits and losses are passed on to the members directly and they are taxed only on income received.
Limited liability companies also have the option to adopt more than one tax structure, including being taxed as:
- A sole proprietorship
- A partnership
- An S corporation
- A C corporation
This provides LLCs with a lot of flexibility in terms of taxation, affording them to adopt a structure that best fits their business.
Inc. vs. LLC: Comparison — Ownership
While there are many differences between incorporated businesses and limited liability companies, in terms of ownership, the difference is quite simple:
- The owners of a corporation are shareholders
- The owners of an LLC are members
This one difference opens up a cascade of multiple differences in the way each business type is structured and managed.
Inc. vs. LLC: Comparison — Members
It is entirely possible for a single individual who is 18 years or older to incorporate a corporation. Depending on the state a limited liability is being formed in, they can be formed with one to five people in the beginning stages. In most states, only one person is required to form an LLC.
Inc. vs. LLC: Comparison — Assets
Both a limited liability company and an incorporation is legally allowed to own personal assets, such as:
- Office buildings
If an LLC member or corporation shareholder ends up facing issues like legal action or bankruptcy, the assets that they own are generally protected. Simply put, this means that any creditors that are pursuing action against the owner in question will be unable to seize any of the assets that are owned by their company. They can, however, target their personal ownership shares in the case of a corporation. This is possible because those shares are considered to be the owner's personal assets and do not belong to the company.
Inc. vs. LLC: Comparison — Liabilities
When considering limited liability companies, the words "limited liability" are referring to the fact that the company's members are offered a measure of protection from being held liable for certain actions and financial obligations of their company. They may, however, still be held responsible for any debts that fall outside of the company's fiscal capabilities. In most states, LLCs are considered to be completely separate legal entities from their members. In others, though, they do not offer this level of separation.
Corporations, on the other hand, offer complete protection for their shareholders, directors, and officers. This usually means that none of these people can be held liable for the company's legal and financial obligations. They are only held liable to the amount of money that they have personally invested in the company. Simply put, corporations are always considered to be completely separate from their owners.
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