What Do Those Letters Mean? A Corporate Alphabet Soup
What is the story with those letters that come after a business's name? "LLC", "Inc.", "Ltd." - what does it all mean? A lot, as it turns out.
Every business entity has a corporate "form" defined by a specific set of laws that govern how it's created and managed, how it raises capital, and the rights and liabilities of its owners, managers, and trade partners. The letters following the names of those businesses are simply abbreviations of the words that identify their form.
The most popular corporate forms are those that allow owners to raise capital and conduct business while limiting their personal liability for corporate obligations. (By default, any business not organized under a law that permits the limitation of liability is either a sole proprietorship or a general partnership.) Every State has its own set of laws for the kinds of liability-limiting corporate forms that can be organized and operated under the laws of that State. Those laws are widely similar State-to-State, but there are some potentially significant variations. In Texas, that law is known as the Business Organizations Code ("BOC").
In this article, we walk you through the three most common liability-limiting corporate forms authorized under the BOC and how they relate to one another
Inc. (a.k.a. "Incorporated")
A company whose name is followed by "Inc." or "Incorporated" is, as the name suggests, a corporation. Under Texas law, there are three types of corporations: for-profit, nonprofit, and special-purpose, with for-profit being the most common. The defining characteristics of a Texas for-profit corporation are the issuance of shares of stock that by default are freely transferable, a perpetual term of duration, the limitation of shareholder liability for corporate obligations, and a relatively rigid governance structure overseen by a board of directors. The BOC dictates in detail the conduct of corporate boards of directors, the rights of shareholders, and how dividends and distributions can be made, among other things.
Ltd. (a.k.a. "Limited Partnership")
A business organization operating as "Ltd." or "Limited Partnership" is a variation on a general partnership. As we noted above, general partnerships are the most basic form of business entity. They automatically come into existence any time two or more people conduct a business for profit. "Partners" in a general partnership are all equally, personally liable for the partnership's obligations. In a limited partnership formed under the BOC, by contrast, so long as there is one "general partner" (a person or a corporate entity) that retains personal liability for partnership debts, the other partners can be "limited partners" without personal liability.
Think of a limited partnership as a business entity that is as unlike a corporation as possible while still offering some degree of limited liability for its owners. Instead of a rigid relationship between shareholders and directors dictated by a detailed set of laws, the relationship between general partners and limited partners is defined by a "limited partnership agreement," the terms of which can be as flexible and nuanced as they all agree. Everything from the transferability of partnership interests, to the rights of partners to participate in management, to when and how capital can be raised, to the termination or winding up of a limited partnership, is subject to potential agreement. The BOC only dictates those terms to general and limited partners in the event they don't address them in the limited partnership agreement.
LLC (a.k.a. "Limited Liability Company")
A business entity designated as an "LLC" or "Limited Liability Company" under the BOC is something of a hybrid of the two corporate forms described above. Like a corporation, all of an LLC's "members" (akin to corporate shareholders) enjoy limited liability for corporate obligations. Like a limited partnership, an LLC's members' rights and obligations, the LLC's management structure, transferability of LLC "units," the LLC's ability to raise capital, its duration and termination, and more, can be defined by agreement with near infinite flexibility, with only bare-bones rules dictated by the BOC in the absence of an agreement. Under federal tax law, distributions from LLCs may also receive favorable treatment compared to dividends paid by corporations or distributions from a partnership.
For these reasons, LLCs have become a favored corporate form for a wide variety of businesses in Texas. Only banking- and insurance-related businesses, title companies and certain cemetery services are barred from operating as LLCs.
At Hendershot Cowart P.C. ("P.C." means "professional corporation" – a topic for another day), we regularly advise our clients on selecting the corporate form best suited their business needs. To speak with an experienced Texas corporate attorney, contact us today.