Understanding C Corp, S Corp, LLC and DBA business structures
Whether you've purchased an existing business or want to start a new company, 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 an S corporation or C corporation, or 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 of DBAs
- 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.
Understanding corporation types - forming a corporation (C corporation, S corporation) or LLC
To incorporate your business as a C corporation, S 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.
To formalize your organization, first learn about and decide which business type is right for you.
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.
A C corporation might be the right business type for you if you:
- May need venture capital for financing
- Want flexible profit-sharing among owners
- Want company earnings to stay in your business so that it can grow
- Want flexibility to spread the business earnings between the corporation and shareholders for tax-planning purposes
- Want flexibility to set salaries for employees/owners to minimize
- Social Security and Medicare taxes
- Want 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
- Want to be able to easily sell your business Want to provide an accountable plan for travel & entertainment
- Want to be able to offer stock options to employees
- Expect your business to own real estate
- Prefer to lower your risk of IRS audit exposure, since there is a higher audit rate for business income that is reported solely on Schedule C of Form 1040 (U.S. Individual Income Tax Return)