Photo courtesy of Dan DeLuca via Flickr.

Inc And LLC, Or, How To Avoid Getting Sued For Business Failures

You see it all the time: company names ending with either “inc,” like Apple, Inc.,  or “LLC,” like the Ritz-Carlton Hotel Company, LLC. Here’s what the abbreviations actually mean.

Inc – incorporated

This simply denotes that the company is a corporation, meaning it’s a legal entity created through laws of where it’s incorporated, according to Cornell University’s Legal Information Institute.

In the U.S., there is no federal law governing how corporations are created. Each state has its own law, all of which are linked on business.usa.gov. There is, however, the Model Business Corporation Act, a template created by the American Bar Association that many states base their laws on.

Still, corporations are free to register in whichever state they want to, even if they don’t do business or have headquarters there. Because of this, more than half of all corporations in America are registered in Delaware, which has “advanced and flexible” laws and courts for corporations, according to a paper on the state website.

Regardless of where they are registered, some basic traits are shared by all corporations. The law treats a corporation as a “person,” meaning it can both sue and be sued, and has to pay taxes.

This means that shareholders, who actually own the corporation, are not personally liable for the corporation’s debts. It also means that stockholders can sue the corporations, easily transfer ownership through shares, and that the business has perpetual life even if an executive or a shareholder dies.

LLC – Limited Liability Company

LLCs, however, are not corporations, though they grant some of the same benefits of corporations to regular companies.

They are named limited liability companies because like a corporation, the owners are not personally responsible for losses incurred by the company. If the LLC incurs debt or is sued, the personal assets of members are usually exempt from seizure, unless wrongful acts have been committed, according to the Small Business Administration.

LLCs also benefit from profit sharing between members, meaning they share profits as they see fit, and from being tax exempt seeing as they’re not separate legal entities. Depending on the state, members can be a single individual, two or more, corporations, or other LLCs.

Disadvantages to LLCs include limited lifespan, meaning if one of the owners leave the LLC, the company has to be dissolved in many states, and any remaining members must re-form the company.

For non-corporate owners, there is also the requirement to pay self-employment taxes, based on the entire income of the LLC.

Did this article help you understand how corporations and LLCs work? Do you have more questions? Tweet @curiousmatic or comment below. 

Ole Skaar