Each company type has key advantages and disadvantages. Here are some things to consider if you’re deciding whether to form an LLC, incorporate as an S corporation or C corporation or to file a DBA.
Filing a DBA
A DBA filing (doing business as, also called an assumed or fictitious business name) allows a company to transact business using a different name. It generally takes place at the county level, but some states have state-level DBA filings. For sole proprietorships and general partnerships, unless a DBA is filed, the company name is the same as the owner’s or owners’ name(s). For example, John Smith is operating a landscaping business as a sole proprietorship. In order to transact business as Smith’s Landscaping, he must file a DBA for that name. Otherwise, he must transact business as John Smith.
A corporation or LLC can also file a DBA to transact business under a name different from the one registered with the state (when the business was incorporated). For example, a corporation formed as Smith and Sons, Inc. may want to do business under a name that more clearly states what the company does and could file a DBA to use a more descriptive name like Smith Landscaping.
Advantages & limitations
- For sole proprietorships and general partnerships, the advantage of filing a DBA is that it does not provide the same ongoing compliance requirements of incorporating or forming an LLC. It merely allows the company to transact business with the new name. The limitation is that it does not provide the liability protection and tax advantages of incorporating.
- A DBA filing does not change the official name of the corporation or LLC. It only allows the business to use a different name in trade, which can be in addition to or instead of the official corporate or LLC name.
Forming a corporation or LLC
To incorporate your business as a corporation or LLC, formation documents—Articles of Incorporation for corporations and Articles of Organization for LLCs—must be filed with the appropriate state agency. Incorporating helps protect personal assets, while sole proprietorships and partnerships that use a DBA incur unlimited liability.
Understanding corporation types
To formalize your organization, first learn about and decide which business type is right for you:
- C corporation. A corporation is a separate legal entity set up under state law that protects owner (shareholder) assets from creditor claims. Incorporating your business automatically makes you a regular, or “C” corporation. A C corporation (or C corp) is a separate taxpayer, with income and expenses taxed to the corporation and not owners. If corporate profits are then distributed to owners as dividends, owners must pay personal income tax on the distribution, creating “double taxation” (profits are taxed first at the corporate level and again at the personal level as dividends). Many small businesses do not opt for C corporations because of this tax feature.
- S corporation. Once you’ve incorporated, you can elect S corporation status by filing a form with the IRS and with your state, if applicable, so that profits, losses and other tax items pass through the corporation to you and are reported on your personal tax return (the S corporation does not pay tax).
- Limited liability company (LLC). Another business type that is formed under state law and gives you personal liability protection is the LLC. Tax-wise, an LLC is similar to an S corporation (or S corp), with business income and expenses reported on your personal tax return. If you are the only owner of an LLC, you are viewed as a “disregarded” entity. This means you report the LLC’s income and expenses on Schedule C of Form 1040─the same schedule used by sole proprietors.
Advantages & limitations
C corporations, S corporations and LLCs provide you with personal liability protection. S corporations and LLCs are commonly used for small business activities. Both enable you to grow your business and take on new owners. Both pass through income to owners who report it on their personal returns. Both cost about the same to set up, depending on the filing and ongoing fees imposed by the state in which you incorporate. One key difference is how owners are affected by employment taxes:
- S corporation shareholders are employees of their corporation so Social Security and Medicare (FICA) taxes apply to compensation they receive, but not to distributions they receive.
- LLC members are self-employed individuals who owe Social Security and Medicare taxes, paid by self-employment tax on their share of business net income.
Incorporating or forming an LLC provides advantages to business owners that operating a business as a sole proprietorship or general partnership does not, including:
Limited liability protection for the personal assets of the owner(s).
- Certain tax advantages such as tax deductions not available to sole proprietors.
- Opportunity to gain credibility with potential customers, vendors, partners, and employees.
- Capital can be raised more easily.
Making your decision
The decision to file a DBA or form a corporation or LLC depends on your particular business, situation and goals. Existing corporations and LLCs evaluating whether to file a DBA may need to consider:
- Does the new name project a business focus that is allowed under the business purpose (as outlined in your Articles of Incorporation or Organization)?
- Are there advantages to creating a subsidiary or an entirely new business to operate alongside your existing business?
For questions regarding your specific situation, consider talking with an attorney or accountant.
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