You may be asking “What does LLC stand for,” “Which entity should I choose,” “What is Inc.,” “What does Co. mean,” “What is LLC,” or “Ltd vs. LLC?” Before you incorporate, you need to choose which type of entity is right for you. This isn’t something you’re born knowing, and it’s not taught in schools. That’s why we’re here to help. Businesses incorporate at the state level, and incorporation law differs from state to state. The state law defines the different forms of businesses available, and states also require certain corporate endings for each type of entity. Here, we break down the different corporate endings and their meanings so you can choose the one that’s right for you.
What is an LLC?
LLC stands for Limited Liability Company. Generally speaking, the best form of entity for most small businesses and property owners is the Limited Liability Company (LLC).
The LLC is a relatively recent creation. Although first available in the late 1970s, it was decades later that most states adopted them. The LLC overtook corporations as the most popular form of business entity in the mid-2000s. This was in large part because of the unparalleled versatility and protection offered by the LLC. Many consider the LLC to be simply light-years ahead of all other forms of business entities.
An LLC is a very flexible form of business. Members own an LLC and it is operated by either third-party managers or the members themselves. You can have an LLC with one member or several, and you can have members with and without voting power. There are no required annual meetings and you do not have to make a new filing with the state if you change how the ownership is divided. The LLC Operating Agreement is the governing document that lays out the ownership percentage of each member and lets them arrange the LLC’s affairs as they choose. This flexibility accounts for why almost 75% of new businesses formed today are LLCs.
What is Co? What About Inc, Corp, and Ltd?
A Corporation is a legal entity that exists completely separate from its officers, directors and employees, and is typically composed of natural persons that hold stock in the corporation, known as “stockholders”. Corporations are different from LLCs in that they are owned by the stockholders and not members. A “general corporation” – with a corporate ending of Inc., Co., Corp., or Ltd. – also appoints directors and officers to handle the day-to-day operations. whereas the LLC just has members. The shareholders elect the directors, who then appoint the officers (President, Treasurer, Secretary, etc.). Shareholders do not elect the Officers of a corporation.
What Does Limited Mean?
The term “limited” means the assets of the owners of the company are protected from the debts, creditors and other liabilities of the business. The owners’ liability is limited to the capital and other investments they contribute to the business. The purpose of limiting the liability of business owners is to encourage investment and promote economic growth by reducing personal risk.
One of the reasons why states require certain types of business structures to have a specific suffix after a business name is to put the public on notice about its owners’ limited liability. For example, LLC’s must end in “LLC”, “L.L.C.”, or “Limited Liability Company”. States do not typically require name of corporations contain the word “limited” even though shareholders of corporations have limited liability.
What Is Incorporated?
Incorporated means that a business has filed documents with a state to become a corporation. The term incorporated is used because, by filing the certificate of incorporation and going on record with the state, the owners become legally separate from their investment and the business itself. The business operation and its pool of business assets and liabilities are “incorporated” into a separate legal “person”.
Other Entities to Know
The following list contains examples of endings which all apply to “general corporations” having shareholders, directors and officers: Inc., Co., Corp., and Ltd. These all indicate the business is a corporation (and are abbreviations of Incorporated, Company, Corporation, Limited). Incidentally, some states allow an LLC or Limited Partnership to use “Ltd.”
What Is a Close Corporation?
You may have heard of a close corporation. It is a form of Corporation designed to cut through some of the corporate separation between the stockholders and officers. These corporations are allowed to eliminate the board of directors. Close corporation laws also limit the number of stockholders allowed. Historically this was only to be used with family businesses. It is old-fashioned since most family businesses today instead form an LLC if they are not comfortable with the rigid hierarchy of a corporation.
What Is an S-Corp and C-Corp?
You may have heard of the S-corp and C-corp. They are not different forms of corporations at the state level. Instead, those are just tax elections the business makes with the IRS and Division of Revenue after the corporation is formed. An S-corp or a C-corp is not a designation the business files with the Division of Corporations at the state level. Instead, the corporation defaults to C-corp status. To elect an S-corp, you should file IRS Form 2553 with the IRS within 75 days of incorporating or within 75 days of the beginning of the calendar year.
What Is a B-Corp?
You may have also heard of the B-corp, which is a B-Lab certification that can be applied for on behalf of certain entities that provide larger social benefits other than maximizing profits. Similarly, a “Public Benefit Corporation” is a corporation that can provide stated public benefits. This is really nothing but a regular for-profit corporation where the corporation is allowed to give away to, or benefit, other causes and concerns consistent with its Certificate of Incorporation without risk of stockholder lawsuits for waste of corporate assets.
What Is a Not-for-Profit Corporation?
Additionally, there is a not-for-profit corporation, which is a type of non-stock corporation. Usually these are organized as public charities or private foundations. They do not have stock and instead are run by members through a board of directors. If a non-stock corporation applies for tax exemption by filing IRS Form 1023 and receives a tax determination letter, it can accept donations tax deductible to its donors as an IRS-approved 501(c)(3) corporation.
What Is a Statutory Trust?
You may also have heard of Statutory Trusts, formerly known as “Business Trusts.” These are entities which function much like traditional trusts with beneficiaries and trustees. These are flexible and governed by a Trust Agreement. They are not recommended for most business purposes because they require a Delaware headquartered Trustee.
The other types of business entities are variations on partnerships:
- What is an LLP (Limited Liability Partnership)? – usually only for professionals like lawyers and doctors – Weakness: does not protect you from your own negligence,
- What is an LP (Limited Partnership)? – requires both active managers called general partners and passive investors called limited partners – Weakness: does not protect the general partner from personal liability,
- What is an LLLP (Limited Liability Limited Partnership)? – same as LP, but it offers general partner personal liability protection – Weakness: unusual form of entity that is similar to an LLC, but unnecessarily complex,
- What is a GP (General Partnership)? – no personal liability protection – partners are each jointly and separately responsible for all of their partners actions,
- What is a Sole Proprietorship (or DBA– doing business as)? – no liability protection whatsoever, inexpensive to form, but very risky.
These above five business types are not right for most businesses. They are clunky for most small businesses or may not offer as much protection or any protection for owners against business creditors.
What Is a Series LLC?
One variation of the LLC is the Series LLC. A Series LLC designates certain classes of assets and members to an unlimited number of internal protected “series”. If operated properly, the liabilities of one series do not attach to the assets of the others. In essence, one LLC can set up many protected business units under the same umbrella, similar to subsidiaries. This allows for internal asset segregation without having to pay an additional state fee for each “protected series” business unit.
Aside from choosing the entity, you also need to choose the state of incorporation. Since the law where your business is located may not be favorable to your company, such as California, Pennsylvania and New York, you should look to the “gold standard” state for incorporation, which is Delaware. Choosing to incorporate in Delaware may help resolve problems with ownership disputes and other issues down the road. Delaware is known for having the best corporate laws and courts to resolve ownership and management disputes. Moreover, the shield of Delaware business law tends to better protect owners and managers from lawsuits.