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You’ll very commonly see one of these three abbreviations at the end of a company name and you’ve probably never really thought much about it before. They are derived from how business entities are often divided into categories based on the structure of their ownership.
LLC stands for Limited Liability Company, LTD. is short for Limited. INC. is short for Incorporated.
Although there are certain similarities between them, these three entities are distinctly different from one another in terms of hierarchy, founding, flexibility, formality, and such. Today we’ll talk about LLC, LTD, and Inc. businesses and what sets them apart from each other, so let’s start from the top:
LLC – Limited Liability Company
Legislation bodies are concerned with accountability and liability, which essentially define the individuals who are responsible for whichever felonies, illegal acts, or “immoral moves” a company may have pulled. The introduction of limited liability came relatively recently for those reasons.
The owners of a limited liability company are known as ‘members’ and all of the income they earn goes through their personal taxes. The term ‘member’, in this particular scenario, refers to an individual who is in a position to govern and manage the company, more so than someone who simply participates in it.
One of the unique things about LLCs is that there can be multiple owners, multiple members, as well as a single owner, and a single member. One-person LLC is almost a default for small businesses nowadays, mainly due to its minimal setup fees, minimal formalities, and the general benefits of this type of entity.
All members in a limited liability company are equals, and their relationships with the company (duties and responsibilities) are normally defined by a document called Operating Agreement.
LLCs are not taxed as corporations, which prevents the common problem of business owners being taxed for both their personal income and for the company itself. This is something that is flexible though.
The members can decide between themselves to opt for taxation as a corporation if they want to incur some of the benefits that come along with that.
In addition, if you choose to subdivide the property, this won’t result in a fully taxable event due to the taxation structure that is typical for an LLC. This is a relatively easy structure to set up and will provide you with personal liability protection so it’s a good choice for real estate investors.
Pros and Cons
The main benefit all members of an LLC can reap is in the entity’s name; limited liability essentially means that the company is a completely separate entity from its ‘members’. This means that the company’s debts and expenses can only be pursued through the company’s funds and property.
The main drawback is that “limited liability” is also limited in a sense. If any owner commits any kind of illegal act or wrongdoing, the individual will be held accountable and personally liable.
The flexibility of a limited liability company is also excellent, allowing members to morph it into an S Corporation, or to be taxed as C Corporations.
LTD – Limited Company
A limited company is one in which the owner’s assets are protected from the various liabilities typically associated with a company such as debt and creditors. Their personal liability is limited to the capital that they contribute to the business.
This will typically encourage investment because it applies to anyone who holds a share in the company. So those who invest will also have limited personal risk. You will often see the ltd abbreviation at the end of a company which is technically considered an S-Corporation.
They can use the LTD. tag in their business name because those involved are protected in a similar fashion. A sole proprietorship is also legally allowed to use it and if that’s what you are aiming for with your investments it would be a wise move to do the same.
Unlike LLCs, LTD companies have an established order of hierarchy, which is up to the founders to dictate. At least one member is required, although there are usually multiple. Another difference between LLC and LTD is that ‘members’ in this scenario are shareholders.
LTD and Sole Proprietorships
Sole proprietorships are categorized as companies in which there is no legal distinction between the owner and the business. It has its advantages of course because you are in control of every aspect of how the business is run, but investors can benefit from a sole proprietorship a lot.
Pros and Cons
Both LTD and LLCs offer reduced personal liability to their members. Due to the professional prestige and status of its members, and LTD company is typically more trustworthy and credible than a limited liability company of a similar ranking.
The setup is fairly more complex in comparison to LLC, and ownership-related issues are quite commonplace.
INC – Corporation
So while LLC and LTD. companies do have some similarities, companies labeled as INC. are somewhat on the other side of the spectrum. These are business entities that are incorporated and are also known as C. Corporations.
Corporations allow for common stakeholders, who are those that can invest in the company and benefit from that while not having any responsibility to the company. This is a huge incentive for potential shareholders.
Corporations may also take on investors who are not citizens of the country in which the business operates, so international expansion is a possibility. They will be taxed at a corporate level, which can often result in double taxation, but the greater level of income generated can allow you to offer dividends to investors which may cancel out the concerns about higher taxes.
While you don’t have as much freedom or flexibility in terms of taxation or management, there are still numerous advantages to this structure and it’s easily the best of the three choices if you are looking to expand as much as possible.
Starting and maintaining a corporation is a big undertaking that costs a lot of money but if you have the time, the will, and the finances then it can be massively lucrative.
Pros and Cons
The potential of rapid growth and expansion is easily one of the most prominent benefits corporations are privy to. INCs can issue bonds and dramatically increase their capital. Personal liability of members is also limited.
Double taxation is the biggest disadvantage of corporate entities. While some may argue that independent management can be a benefit, in practice, it can be detrimental when a company has multiple investors without a defined majority interest.
So which of these three you go for will ultimately come down to your personal circumstances and preferences. For most real estate investors, LLC will be the right choice because of its high flexibility and low taxes.
LTD. has its advantages in being an enticing prospect for potential shareholders, and INC. will allow for the greatest level of expansion. Consider each of the three before making your decision so that you can be assured of success right from the start.