Ltd., LLC, INC., Etc...

[Thrindorf]

What is the difference between Ltd., LLC, INC, and other company indicators?

What other ones can be found in the entertainment industry?

How does one go about registering a company with Ltd., or LLC?

Do you need a lawyer?

[Oloh]

Great question Thrindorf!

By way of background, if you start doing business without forming a corporate entity, its called a sole-proprietorship and is a perfectly valid way to do business. If you have two people that just start doing business, its the same deal, but called a "partnership." Those two forms of business are not really separate entities and are really just the owners of the entity doing business.

Let's talk about the corporation. The corporation is the basic "separate" business entity. It stands alone and can do business as a separate "person," and not as its owners.

So lets take a car for simple example. This is not 100% correct, but I want to use it as an example to get the point across. If you have a partnership, one of the partners has to "own" the car because the partnership cannot. If you have a corporation, the corporation, and not the owners, can own the car itself.

How is this handy? The main reason is for liability protection of the owners. If you go to get a loan as a partnership, and you cant pay, then the bank can come after the partner's cars and houses, etc. If you do it as a corporation, the bank is limited to collecting from the corporation.

(Note many banks will make the shareholders of the corporation sign a guarantee, which largely circumvents the purpose of the corporate entity.)

So why doesn't everyone do a corporation? Well the number one reason is for taxes. Because corporations are a separate entity, they get taxed as a separate entity. By way of example, if you are a mechanic that owns a partnership business, and a guy pays you $100 to fix his car, that $100 is income for you and taxed accordingly. If its a corporation, then the corporation makes that $100 dollars and gets taxed as its income. When the corporation "pays" the mechanic, it gets taxed again as income. So there is a problem with double taxation.

For big corporations with huge expenses and teams of accountants to manage it all, it is not that big of a deal, and the benefits of the corporation far outweigh the tax problems.

For smaller companies, with a couple of owners that do the work directly, the double taxation is prohibitive. So, the law adapted and created new "pass through" taxation entities.

These are things like the Limited Partnership (LP) and Limited Liability Company (LLC). They allow the owners to conduct business as an entity (so the car can be in the company's name), but not be subjected to double taxation. There are limits on which entity can be used and when each one is appropriate.

So there you have it. All of those terms at the end basically relate to the type of entity chosen. They are chosen for two major reasons, liability and taxation.

For your first question. Anyone can form an entity by filing with the State in which you want to form. That being said, I would strongly advise against doing it yourself. Nearly every corporate lawyer forms dozens of companies a year. They know how to do it, do it right and can get you the proper form documents to start you off on the right foot. You can probably pay a lawyer to start you a company for $200 - $1000 plus the fees to pay to the State. While that sounds like a lot, you will benefit in the long run because you will have all of the documents and procedures ready when problems come up (and they WILL come up).

Typical incorporation documents include the articles of incorporation (or other similar agreement), bylaws, a minute book and initial minutes, and share certificates. They are usually done in a nice leather binder that can fit on your shelf and operate as your "proof" that an entity exists. The lawyer will also tell you how you should sign documents to make sure that it is the company and not you personally that is signing.

Does that help?

[Thrindorf]

Is Ltd. the same as LLC? Could there be one owner of an Ltd?

[Oloh]

"Ltd." is typically a foreign designation for a corporate-like entity. It can also be used for domestic corporations in some States.Any entity can have one owner. In a "Ltd." case, the owner (or owners) would most likely be shielded from liaibility individually. "Ltd." stands for "Limited."

You can't really tell what the company is by "Ltd." designation. It could really be any of them. What State or Country are they from?

[Eclipse]

Sole-proprietorships cannot have limited liability, but some partnerships can. There would always be one or more partners who would be subject to full liability, but this can be the case in certain situations. Corporations, however, often have limited liability as their business is considered its own legal entity.
You can only lose what you put into a corporation, they cannot come after you personally for losses.
In partnerships where you have 2 or more people in charge* (loosely speaking) all partners may share liability, or in some cases one would take full responsibility while other partners are limited to what they can lose.

Is that about correct?

-Eclipse

[Oloh]

Is that about correct?

Close enough! Technically, there are two different entities that sound a lot alike. If you dont do anything, and there are two owners involved, you have a plain partership.

There is also an entity called a Limited Partnership ("LP"), but that is really completely different. A LP works exactly as you describe, where you have "general partners" that are subject to liability and "limited partners" that are not.

LPs are pretty rare now adays, except in the real estate markets. I do not do a ton of real estate stuff, so I am not sure why they still exist a lot there.

At any rate, it gets pretty complicated quickly, because a lot of times, you have a corporation act as your general partner, and the individual investors are all limited partners. The invidviduals are also all on the board of directors and are the shareholders of the corporate general partner.

Get it?

[Eclipse]

yup, and I do the real estate stuff and can kind of understand why LP still happens more often there.
Some investors know exactly what they should do with their money, and some don't. But often times one thing is clear, if someone comes along that they trust can turn them a profit with their investment without them having to do any of the work, they're usually excited.
I've done this, and I will continue to do it until I'm too old to have a conversation.
I would enter into a partnership with an investor, sell myself to him/her and in all essence "make them pay for everything" but I would do all the work.
As an example: Let's say the area I currently live in has *AMAZING* real estate opportunity, and a place like..hmm, Toronto, for instance doesn't. But Toronto is full of rich people who are literally looking for someone to give their money to.

I'm not going to bore you all with the details, but basically, for whatever length of time we are in business together; I use his money to make us both a profit. And my personal way of doing it is to first off give them back all the original proceeds, and then 50% of whatever was made on top of it. Whether it entails a quick flip of a house, or an ownership transition of an apartment building/hotel.

My goals in life include owning and operating a real estate developing business, so all of this stuff is pretty important to me, and very useful. It is also what I am in school for. Marketing/Management. But I took business law courses, and have more lined up in the next couple semesters. Going to school to dos oemthing that people have generally thought to do without education feels like such a better course of action.

Anyways, me boring you is now done ;)
Thansk for the response!! it makes perfect sense, and I'm glad I could at least say something intelligible. :D

-Eclipse

[Eclipse]

Close enough! Technically, there are two different entities that sound a lot alike. If you dont do anything, and there are two owners involved, you have a plain partership.

?

Aye, but you can also have a plain partnership with more than two partners, correct? The term 'partnership' entails more than one but not necessarily just two, right?

-Eclipse

[Oloh]

Correct a partnership is just more than one person doing business together without another form of entity in place. In essense, it's the "default."

[Eclipse]

If starting your own business, it is very important to look at your advantages and disadvantages for what you choose to do. I would personally favor a partnership over a proprirtorship because I like having a few different perspectives on any given idea.
But also, this may sound dumb, but what separates a pro. business and a partnership business from a corporation is the limited liability, legal entity status and a few other things.
How, then would one form a corporation? Can they be formed by the private sector of business?

It seems to me that a corporation would have more freedom, but more to lose. Maybe my question will be baseless and I missed an important concept that would make me unable to do this. So what would a partnership business or a proprietorship business have to do in order to get legal entity status in America? And if you have any idea...Canada as well, if different.

Corporations in Canada face different issues, but either way, your input would be well-recieved.

Thanks,

[edit] Keep in mind I am not asking for professional advice, just a bit of information on the possibilities. Not sure if this disclaimer is needed anymore, but here it is anyway.

-Eclipse

[Orlun]

Remember in a partnership your only as good, as flexible, as creative, as brave as your partner. Most of the advice I see is that if you can, do it yourself and reap all the rewards. (unless your an idiot and you potential partner is brilliant :p )

[Oloh]

Choice of business entity should never have any bearing on what you want to do. What you want to do should have bearing on which entity to choose.

Think of it like building something. You dont pick out your tools and then decide what to build. You decide what to build and then pick the tools to do it.

The same goes with a business. There is no "best" entity, just like a screwdriver is not "better" than a hammer.