Many people choose to start running their business by just starting to do their thing. If it is by themselves, they are a sole proprietor. Lots of hairdressers do that. Get a chair, some scissors, and a whole lot of skill, and ta-da! A business! Some join with one or two others to start, and now we have a general partnership. In neither case do they have to inform the government that they are up and running (unless there are other licensures in play) to start. But the owners are personally holding all of the risk of the business.
However, businesses often choose to take some extra steps and formalize into a specific entity as defined by their state. Why? A main reason is to limit their personal risk. If the person is the business, all of the risk falls to the person. But if there is an entity that is doing the business, the owner can keep their personal assets much more protected. Another reason is that it picks some rules about how that business is to be run. Maybe the owners want a board of directors, maybe not. Maybe they want everyone to have a say in lots and lots of stuff, maybe not. But once they pick the entity, they pick some rules so everyone knows how certain things are going to go. Once one decides they want to pick a formal entity with its associated rules and benefits, one has to tell their state government that they want their business to be separate from themselves. They pick an entity and file some paperwork. That might be a corporation, a limited liability partnership, a limited liability company, or, if they are extra special, they might be a service or a professional corporation.
In Wisconsin, we have service corporations (not to be confused with the tax designation of S-Corp. I know, I know, but they are different). Service corporations are companies that for “persons licensed, certified, or registered pursuant to any provisions of the statutes” and “carrying on the particular profession, calling, or trade for which the licensure, certification, or registration of its organizers is required.” Or to put it simply, the company has to get special licenses to provide their services, and people in the company have to have that license in order do it. We often refer to those people as “professionals.” Think dentists, accountants, or lawyers – though those three are not the only ones who can choose to be a service corporation. In addition, one can be one of those specially licensed people or a business doing those specially licensed things, and not be a service corporation. It is just one more option to choose from about how one wants to operate their business and limit their risk.
If a business chooses to be a formal entity, they should put that designation in their formal company name. That way everyone knows that they chose to limit their liability and agreed to follow some rules about how to run their business. Though, again, there is some choice. The corporate name of a service corporation must end with the word “chartered” or “limited,” or the words “service corporation,” or the abbreviation “ltd.” Or “S.C.” So if you are looking at a company name, if you see something like Inc., LLC, LLP, or S.C., you know the business is limiting their risk to the entity as much as they can as opposed to the owners. If you see S.C., you know that they provide licensed services and have chosen to follow certain rules required for service corporations (like having directors and distributing profits in a certain way).
So much like those spray-painted lines and letters on the sidewalk, simple designations that you see every day carry a lot of information if you know what it means. It also means that when you start a business, you have lots of choices available to you. Don’t be afraid to ask your friendly neighborhood lawyer what those designations and choices are. We will be (overly) delighted to discuss!