What Even is an "Inc.," Anyway?

Everything you need to know about the Inc. business formation.

Everything you need to know about the Inc. business formation, from what it is to whether or not you should form one.

May 9th, 2019   |    By: The Startups Team    |    Tags: Strategy

What is an Inc.?

“Inc.” stands for “incorporated.” If you see it after the name of a company, it means that company is legally incorporated in at least one state. The founders have filled out all the paperwork, paid all the fees, and is viewed as a corporation by the government and the IRS.

How does an Inc. work?

Structure of a Corporation

Let’s look a the structure of a corporation, which most Incs. are. Corporations have three main tiers of management: shareholders, directors, and officers.

Shareholders The shareholders of a corporation are the owners. They’re the ones who “hold” shares of stock. Depending on how much stock they own, they have varying degrees of influence on the corporation — but they don’t make the decisions or run the day-to-day. Instead, they elect the company’s directors, who take care of all of that. They also vote to remove directors, when it seems like those directors aren’t working in the best interest of the corporation.

Directors The Board of Directors is elected yearly by the shareholders and they have a more direct involvement with the running of the corporation. They’re obligated to have an annual meeting about the business, as well as elect the corporate officers, set operation policies, expand the business, and authorize financial decisions. If a director doesn’t act in the corporation’s best interests, they can be held personally liable.

Officers Officers are elected by the Board of Directors and they manage the day-to-day operation of the corporation. There are usually four officers: President, Vice President, Treasurer, and Secretary. They’re in charge of keeping things moving along, managing employees, and taking care of the nitty-gritty.

Structure of an LLC

LLCs have a slightly different structure. Them main tiers of management are members and managers.

Members LLCs are owned by members and members are anyone who holds interest in the company. In an LLC, any company decision has to be approved by all members. A company that’s completely run by members is called a “Member Managed” company.

Managers Some LLCs choose to appoint managers for their companies, which allows the members to step back a little from the day-to-day operation of the company. LLCs that are managed by managers are called “Manager Managed” companies.

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Types of Incs

There are four main types of incorporations in the United States: C-corporations, S-corporations, B-corps, and LLCs.

C Corporation “C corporation” or “C corp” simply stands for “corporation.” Corporations are a business entity that exist entirely separately from their owners. They can be taxed, make a profit, and be held liable. In fact, they offer the highest level of protection from personal liability for the owners.

One big downside of a C corp is that it can pay double taxes. The first set is on any profits the C corp makes, while the second set is on the personal tax returns of shareholders, when they’re paid dividends. C corps also require extensive record-keeping, specific operational processes, and strict rules about reporting.

When it comes to stock, C corps can issue stock and shareholders can sell their stock and/or leave the business without affecting the life of the corporation, unlike some other types of incorporation. A C corp is a good option for a company that’s planning on eventually going public.

S Corporation While C corps face double taxations, a main advantage of starting an S corp is that it only pays taxes once: Income and losses are passed through to individual shareholders and they pay taxes on their individual tax returns. Like other types of corporations, the owners of an S corp are protected from personal liability. S corps can also have up to 100 shareholders, which can make it easier to bring on more investors and therefore more capital.

However, S corps are still corporations, which means they’re more complicated than non-incorporated businesses. For example, they have to file articles of incorporation, hold directors meetings and shareholders meetings, keep corporate minutes, and let shareholders to vote on any big decisions related to the business. They also have higher legal and tax costs than unincorporated businesses, while the cost of set up is similar to other corporations.

Things are a little different when it comes to stock with S corps as well. They can only raise one class of stock and can only be owned by individuals, estates, and certain kinds of trusts.

B corp “B corp” stands for “benefit corporation.” In addition to making a profit, shareholders hold B corps to contribute in some way to the public good. In some states, B corps are required to produce proof that they’re contributing to the public good. They’re taxed the same way as C corps.

LLC “LLC” stands for “limited liability company” and it’s an increasingly popular form of incorporation in the United States. In an LLC, owners get the benefits of both partnerships and corporations. Like S-corps, earnings and losses are passed through individual owners and included on their personal tax returns. Unlike S-corps, they have no limit on the number of shareholders they can have.

However, they also don’t offer stocks, which can make things tricky when it comes to raising money. Without stocks, you also can’t use partial ownership as an incentive for potential employees. In an LLC, you also can’t deduct the cost of employee benefits.

LLCs also aren’t around forever, unlike other forms of incorporation. If a member dies, quits, or retires, the company has to be dissolved and reformed. It can also be tricky to incorporate in the United States because each state has their own rules and fees.

All of these factors mean an LLC may be a better option for a small company, with only a founder or with few employees, rather than a company that’s looking to scale. Or, at the very least, consult a specialist who knows a lot about the types of incorporation before choosing the one you want to go with.

Advantages and disadvantages of an Inc.

Why should you incorporate your company? Here are some advantages and disadvantages of establishing an Inc.

Advantages of an Inc.

1. Limited liability When a business is incorporation, the owner is protected by limited liability protection. That means if something happens — like you get sued or the company goes under — your personal assets are safe.

2. Gives you credibility Investors often like it when your company is incorporated because, well, it just looks more legitimate! It can also help with acquiring new customers and partners.

3. Monetary benefits It’s easier to raise money, sell stocks, and transfer ownership when your startup is incorporated.

4. Easier to set up retirement funds. Retirement funds aren’t something the self employed always think about, but with an incorporated business, it’s much easier to set up that 401(k).

5. Keeps your company alive. When a company is incorporated, the corporation lives on even if the founder dies. We know that sounds kind of macabre, but it’s something to consider!

Disadvantages of an Inc.

1. Double taxes If you choose to incorporate as a C-corp, your company will be subject to double taxes. You can avoid that whole deal by registering as an S-corp.

2. Continuing fees One big bummer of being incorporated is that you have to keep paying to stay incorporated. In addition to the initial registration fee, you’ll have to pay a “filing fee” every year to stay registered.

3. Increased amount of record keeping If your company is a corporation, there are initial and annual rules about record keeping. In comparison sole proprietorships, general partnerships, and limited liability companies (LLCs), don’t have to do the same.

How to set up an Inc. (a.k.a. how to incorporate!)

There are a few steps that a company needs to take in order to set up an Inc.

Choose the state you want to incorporate in.

Interestingly enough, you don’t have to incorporate in the state in which you live. Many companies choose to incorporate in Delaware, for example, because the court system there is more expedient than in other states. Venture capitalists also prefer Delaware incorporation, as they’re generally more familiar with that court system. Do a little research into filing fees, registration fees, and other factors when you’re deciding the state in which to incorporate.

Choose a business name.

Pick a name and make sure it’s not already taken by a business in your state.

Decide which type of corporation you want to be.

There are a three options when you’re choosing the type of corporation you want your business to be: an S-corp, a C-corp, or an LLC. In an S-corp, shareholders pay taxes but the business does not, which is called “pass through taxation.” In a C-corp, you’ll pay corporation taxes. And in an LLC, you get a combination of pass-through taxation and the limited liability of a corporation.

Choose a board of directors.

Choosing a board of directors is an important part of getting a company going. Your board will represent the interests of your shareholders and will also help make major decisions for the company.

Determine the type of shares you’ll be issuing.

What kind of shares will you be issuing your shareholders? The options include ordinary, preferred, or shares with or without voting rights.

Designate a registered agent.

Who’s going to be in charge of all the legal documents once you’re incorporated? That’s your registered agent and the government is going to want to know that name.

File articles of incorporation.

Once you have everything all together, it’s time to file your articles of incorporation! The cost and process differs from state to state, so make sure you’re following the instructions for the correct place when you file.

Establish bylaws.

You’ll also need to have a set of bylaws, which are the rules by which your company will run.

Issue stock.

Once you get that official registration notification from the government, go ahead and issue stock!

About the Author

The Startups Team

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