What is Inc: Everything You Need to Know
“What is Inc.?” is a common question to ask when it comes to starting a business. 7 min read
What Is Inc.?
“What is Inc.?” is a common question to ask when it comes to starting a business. The first step to getting a business off the ground is to establish it as a legal entity. There are several different legal business structures that this entity could be, such as a corporation, limited liability company, nonprofit, or partnership. After a business is formed, it is usually designated by an abbreviation signifying the chosen structure (ie. Inc., Ltd., Co., LLC, etc.)
There are significant accounting, tax, and legal implications to choosing the right business structure, so business owners should consult professionals think carefully about which one works best for them. Entrepreneurs often overlook how important choosing the right business structure is. And when it comes time to make a decision, new business owners often rely on generic information they learn from the Internet for guidance.
But this can be problematic, because business law is exceedingly complex. Moreover, businesses are largely formed according to state law, and each state has its own set of laws regarding how different business structures are defined and regulated.
The abbreviation “Inc.” is so for incorporated.” This abbreviation can refer to either a traditional C corporation or an S corporation. Incorporated companies are separate legal entities from the shareholders that own it and the directors and officers that manage it. Generally, only the corporation itself is liable for its debts. Because it is a separate legal entity, a corporation automatically survives when a stockholder or any member of the company leaves or dies.
Corporations are formed when the proper paperwork is filed with the Secretary of State in the state in which the corporation will be headquartered. At a minimum, this requires the filing of Articles of Incorporation that meet state law guidelines. There are administrative requirements and annual filing requirements that corporations must adhere to. This can be costly, and sometimes the rules can be too complex for business owners to follow without professional legal assistance.
According to the U.S. Small Business Administration, small businesses should only incorporate if they are an established company and plan on growing.
A “Ltd.” is a “Limited Company.” This type of structure is most commonly used in European countries and in Canada. Limited companies limit the liability that directors and shareholders have for company debts (as with corporations), but in an Ltd, liability for company debts can be structured to align with the percentage of ownership in the company that a person has.
In a “private company limited by guarantee,” shareholders act as guarantors of the company debts, and are liable for debts based on the percentage of stock in the company they own. This type of structure is popular with non-profits and charities.
This abbreviation is a catch-all for any company business structure. Even partnerships and sole proprietorships can use the abbreviation Co. Thus, this abbreviation does not designate any specific legal business structure.
The abbreviation “LLC” stands for “Limited Liability Company.” This is the preferred business structure for most small businesses. An LLC provides many of the same benefits of incorporation – namely that owners are insulated from personal liability for company debts – but does not carry with it the strict legal requirements. LLCs are not incorporated and thus do not issue stock.
LLCs are owned by “members” that share profits and typically must pay self-employment taxes. If a member decides to leave an LLC, the other members may buy-out the departing member’s interest and continue on with the LLC. Most LLCs haven “Operating Agreement” that specifies what happens when a member decides to leave. An Operating Agreement establishes the rights of the members and describes how the LLC will be managed.
As with corporations, LLCs can only be formed when the proper paperwork is file with the Secretary of State. At a minimum, this would include Articles of Organization, which are usually very simple. But many states also require Operating Agreements to be filed as well. As with corporations, annual reports need to be filed as well.
Advantages of Corporation
Corporations may issue stock. This allows corporations to attract new investors with ease. Overall tax liability can be limited in a corporation with income sharing.
Disadvantages of Corporation
There are two major disadvantages to the traditional C corporation. The first is that C corporations suffer from double-taxation. The corporate profits are taxed, and shareholders must pay taxes again when they receive dividend payments. S corporations avoid this double taxation problem, but S corporations are also subject to a number of restrictions. For instance, S corporations are limited to 100 shareholders.
The second disadvantage is that corporations require more detailed filings and have more stringent administrative requirements. For instance, C corporations must keep records, hold annual meetings, and maintain a Board of Directors.
The Legal Difference between INC. and Corp.
There is no legal difference between the abbreviation "Inc." and the abbreviation "Corp." If you are representing a corporation, either suffix is appropriate; although it is a good practice to be consistent.
Advantages of LLC
There are no limits to how many people can own an LLC. Members are insulated from liability for the company’s debts, but the business earnings pass directly through to the members untaxed. Members then pay taxes on the profits they receive on their personal income taxes. Therefore, LLCs do not suffer from double taxation. There are fewer administrative requirements when compared to corporations.
Disadvantages of LLC
The growth of an LLC is limited because an LLC cannot issue stock. LLCs also cannot utilize income splitting to lower tax liabilities.
State Naming Rules for Corporations
California doesn’t require any particular suffix to be used; however an indication that a company is incorporated must be given.
Delaware requires corporations to refer to themselves with one of the following designations: association, company, corporation, club, foundation, fund, incorporated, institute, society, union, syndicate, limited, co., Corp., Inc., or limited. However, if an entity has assets of more than $10,000,000 and makes a special filing with the Delaware Secretary of State, this can be avoided.
In Maryland, Massachusetts, New York, and Nevada, the designation must be either: "corporation'', ''incorporated'', ''limited'', ''Inc.,'' ''corp.'', or ''Ltd.'' In New York, charitable and religious organizations are exempt from this rule.
Corporations can be formed by filing Articles of Incorporation with the Secretary of State in the state that the corporations will be based in. Each state has its own requirements for what information needs to be in the Articles of Incorporation, but in general at a minimum these need to include a purpose of the corporation, the principal place of business, and the number and share of stock. Registration fees must also be paid.
Corporate Bylaws may also need to be filed with the state. The Bylaws of a corporation establish how the corporations will be managed and run, and the extent to which the shareholders will be involved. Bylaws include dates that annual shareholder meetings will be held, how shareholder votes will be carried out, and whether any special meetings will be held.
Shareholders are the owners of corporations, and management is carried out by a Board of Directors and the executive officers appointed by the Board. Officers manage the day-to-day business affairs and would include positions such as CEO, CFO, Secretary, Treasurer, etc.
LLCs are owned by Members and are managed according to the Operating Agreement. In some LLCs, the members are directly involved in the management; in others, Members appoint non-owners to manage the LLC for them. There is significant flexibility for Members when it comes to how an LLC is managed.
In both corporations and LLCs, owners are typically not liable for company debts.
Corporations and LLCs are separate legal entities and therefore can own property in their own right. The personal assets of shareholders or LLC Members are not typically connected in any way to the corporation or LLC.
Corporations are taxed at a much lower rate than individuals in the United States. Moreover, corporations can own stock in other corporations, and in doing so are able to gain stock profits tax-free. And corporations can carry losses and profits to the next year if it benefits them for tax purposes.
When a corporation pays stock dividends to shareholders, these dividend payments are taxed as part of the shareholders’ personal incomes.
Any person over the age of 18 years can form a corporation.
Other Entities to Know
A “close-corporation” is a corporation owned by a tight-knit group of people that have decided not to have a Board of Directors. Instead, the shareholders directly run the corporation. These types of “closely held” corporations are usually family businesses.
A B corporation is a corporation that prioritizes providing a public benefit more than making a profit. In a typical corporation, maximizing profit is the sole purpose of the corporation, and any deviation from this goal is grounds for a shareholder lawsuit. In a B corporation, the corporation can give away money to charity or make public investments without regards to profit.
Non-profits exist to serve some charity, public mission, or other social purpose. There are strict requirements that must be met for a company to be deemed a non-profit.
A Limited Liability Partnership (LLP) and Limited partnership (LP) are good options for small businesses that will have two or three active owners. These types of partnerships are popular among professionals such as doctors and lawyers.
A Series LLC is an LLC that designates certain classes of assets and members that have separate ownership rights from other classes of assets of members within the same LLC.
Choosing the State of Incorporation
Because state laws differ, choosing the right state to incorporate in matters quite a bit. The state where a business is located may or may not be the best choice. Delaware is generally considered the best state to incorporate in because Delaware has a low tax rate and very favorable corporate laws.
If you need help with incorporating, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.