The Difference Between Inc. & Ltd. & Co.
When you’re starting a small business, deciding its legal structure is one of the first steps. Legal structure is usually determined by the business type, the number of owners or investors it has, and how tax and liability issues are best managed. You’ll likely use an abbreviation, such as Inc., Ltd., Co., or LLC, after your business’s name to indicate its structure.
Inc. is the abbreviation for incorporated. An incorporated company, or corporation, is a separate legal entity from the person or people forming it. Directors and officers purchase shares in the business and have responsibility for its operation. Incorporation limits an individual’s liability in case of a lawsuit. The corporation, as a legal entity, is liable for its own debts and pays taxes on its earnings, and can also sell stock to raise money. A corporation is also able to continue as an entity after the death of a director or stock sale. A corporation is formed according to state law, through application to the secretary of state and filing articles of incorporation. Because corporations cost more to administer and are legally complex, the U.S. Small Business Administration recommends that small businesses not incorporate unless they become established as a large company. In most states, corporations must add a corporate designation, such as Inc. after their business name.
A limited company can be abbreviated to Ltd. This structure is used mostly in European countries and Canada. In a limited company, directors and shareholders have limited liability for the company’s debt, as long as the business operates within the law. Its directors pay income tax and the company pays corporation tax on profits. Responsibility for company debt is usually limited to the amount a person has invested in the company. A limited company can be set up in four different ways. In some companies, a shareholder’s liability is limited to specific predetermined amounts, drawn up in a memorandum. These businesses are known as “private company limited by guarantee,” and shareholders are called guarantors. Charities and social enterprise groups frequently use this structure. In England, limited companies must also have a pay-as-you-earn system established for collecting income tax payments and National Insurance contributions from all employees.
Companies in General
Co. is an abbreviation for company, a catchall phrase for an association of people working together in a commercial or industrial enterprise, such as in a sole proprietorship, limited liability company or corporation. The abbreviation Co., like the word company, does not carry meaning as a specific legal structure on its own.
Limited Liability Companies
LLC stands for “limited liability company.” An LLC brings together some features of both business partnerships and corporations, although it is more like a partnership. Owners, also called “members,” are protected from liability, but the business’s earnings and losses pass through to owners, who report them on their personal income taxes. This makes its structure less complex than that of a corporation, but like a corporation, LLCs must offer stock. Members share profits as they like. Members are considered self-employed and must pay self-employment tax. When a member of the LLC leaves, the business is dissolved and the remaining members decide if they want to start a new business. An LLC is also formed according to state law, through application to to the secretary of state and filing articles of incorporation. LLCs must also indicate in their names that they are an LLC or limited company.