Understanding C corp, S corp, LLC business structures, and DBA
Whether you've purchased an existing business or want to start a new one, you must first decide which company type (also known as “business structure” or "business entity") is best for you. 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 a corporation (including S corporation and C corporation), or file a DBA.
A DBA is not a type of business structure. Rather, a DBA (“doing business as”) allows a company to transact business using a different name. A DBA is also commonly referred to as an assumed or fictitious business name. A DBA filing generally takes place at the county level, but some states have state-level filing requirements.
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 formed. 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. It could file a DBA to use a more descriptive name like Smith Landscaping.
Advantages and limitations of DBAs
- For sole proprietorships and general partnerships, the advantage of filing a DBA is that it allows the company to transact business under a name other than the name of the owner(s). There are no ongoing compliance requirements that come with incorporating or forming an LLC.
- A DBA filing does not establish a business as a legal business entity, nor does it 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.
Understanding business entity types: Corporations and LLC
To form your business as a corporation or LLC, formation documents must be filed with the appropriate state agency. (Articles of Incorporation are used for corporations, and Articles of Organization for LLCs.) Incorporating helps protect personal assets, while sole proprietorships and partnerships (whether or not they use a DBA) incur unlimited liability.
C corporation business type
A corporation is a separate legal entity set up under state law that protects shareholder (owner) assets from creditor claims. Incorporating your business automatically makes you the standard (or “C”) corporation. A C corp is a separate tax status, with income and expenses taxed to the corporation. If corporate profits are then distributed to owners as dividends, owners must then 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 the C corporation business structure because of this.
A C corporation might be the right business type for you if you want or need
- Venture capital for financing
- Flexible profit-sharing among owners
- Company earnings to stay in your business so that it can grow
- Flexibility to spread the business earnings between the corporation and shareholders for tax-planning purposes
- Flexibility to set salaries for employees/owners to minimize Social Security and Medicare taxes
- Flexibility to provide (through the corporation) substantial health and medical benefits and other fringe benefit programs for things like education, life insurance, and transportation costs
- To be able to easily sell your business Want to provide an accountable plan for travel & entertainment
- To be able to offer stock options to employees