DBA vs. Sole Proprietorship vs. LLC vs. Corporation: How To Choose The Right One

You need to decide between DBA vs. sole proprietorship vs. LLC vs. corporation. That's because, by law,  you need to have a legal formation. But with so many options, which one is the best fit for your business? Each structure has different features, pros, and cons. And picking the right one will allow you to manage three elements: liability, taxes, and complexity. The good news is you don’t need to be a lawyer to decide on your legal formation. This article will help you understand each one.

Business Structures At A Glance

Let’s review each of the legal formations you can choose for your business: Sole Proprietorship, Corporation, and LLC (plus DBA).

#DidYouKnow Each of the legal formations takes very different approaches to taxation.

Let's take a more in-depth look at DBAs and all business structures.

What Is A DBA?

DBA is an acronym for “Doing Business As.” It refers to the difference between the legal name of the business and the name by which it operates day-to-day. The name by which customers and associates may know the company (the DBA). Some states require businesses to register the DBA name before using it, such as California and Florida.

A DBA is not a legal structure but rather a way to allow a sole proprietorship to have a business name without filing an LLC or Corporation.

While simple and inexpensive, it comes with the same risk as a sole proprietorship or general partnership.

When To Get A DBA

There are several reasons why business owners would get a DBA:

• To open a business account at a bank.
• If they want a unique name to sell their products and services.
• To increase credibility in the marketplace by using a name that customers will remember.

How To Set Up One And Requirements

1. Check with your local secretary of state to verify that the DBA name is available.
2. In most instances, you can register the DBA online or file the paperwork at your county clerk's office.
3. You may need to register the DBA with both the county and your secretary of state office.
4. Also, your county may require that you publish your DBA name in a newspaper.
5. After 2-4 weeks, the agency mails you the DBA certificate.

#DidYouKnow Some states require that you register a DBA while others don't.

Filing fees average between $10 to $50.

Pros And Cons Of "Doing Business As"

Advantages:

• You can brand your product or service to reach more customers.
• It allows you to increase personal privacy by using a business name.
• You could own several businesses under one DBA

Disadvantages:

• There are no additional tax benefits compared to a sole proprietorship.
• A sole proprietor doesn't have personal liability protection from lawsuits.
• Owners must renew DBAs according to their state's requirements.

DBA vs. Business License

What Is A Sole Proprietorship?

By default, unless you file otherwise, your business will be a sole proprietorship, which means there is one owner. This is the simplest business structure to form.

If you are self-employed or, as previously mentioned, not yet determined a structure, then this is your default.

When To Use This Structure

If you don't want to set up a business under a partnership or corporation, you can operate it as a sole proprietorship. Many business owners use this business entity to build their business and start earning revenue. Then as the business grows, they may decide to switch to a different business entity to gain benefits such as personal liability protection and tax deductions.

#DidYouKnow You can convert your sole proprietorship to another formation.

Formation And Compliance Requirements

Sole proprietorships are the simplest business structure to set up because there's little paperwork involved.

1. If a sole proprietor decides to operate their business using a DBA, they must register the name with their state's secretary of state.
2. Additionally, a sole proprietor obtains a business license and any necessary permits required by the county or state.
3. It isn't necessary, but some sole proprietors get an Employer Identification Number (EIN) to separate business and personal expenses and appear more professional and competitive in their industry.

There’s a nominal fee ranging from $10 to $50

More About Sole Props

• Management structure: The business owner manages the business and is responsible for debts, losses, and liabilities. They report taxable income earned from business activity on their personal tax return.
• How do sole props file taxes? Sole proprietors complete a 1040 personal tax return to report business earnings and pay tax on taxable income.
• Legal protections sole props: There are no legal protections when running a business as a sole proprietorship as the business owner is personally liable for all financial responsibilities.
• Do sole props need to register their business name? Depending on a state's registration requirements, they should complete the paperwork to register a DBA with their county or state.

Pros And Cons Of Sole Proprietorships

Advantages:

• It is very simple to form and maintain.
• Since there isn’t a delineation between the business and the owner, the owner earns any income earned by the business, so they don't need to file separate taxes.

The Cons

• There is no separation between the business owner and the business. So, if someone sues your company or your small business defaults on any loans, your personal assets (home, cars, personal bank accounts) can be on the hook.

Sole proprietorship vs partnership

What Is A C-Corporation?

A corporation is an entity considered separate from its owners. Therefore, the owners are not held responsible for any financial hardships or lawsuits filed against the business.

This protection is often called a “corporate shield,” as it shields the owners’ assets.

When To Use This Structure

C-Corporations protect the personal liability of employees, directors, officers, and shareholders. Investors prefer this type of corporation to invest in equity and increase the principal value of the amount they invest.

Formation And Compliance Requirements

1. Once you choose a business name, select the board of directors and file articles of incorporation to register your C Corporation with your state's secretary of state.
2. Once approved, shareholders can purchase stock.
3. You will need to get the business licenses and permits your state or county requires to operate your C Corporation.

The filing fee can range from $100 to $800, depending on your state.

More About C-Corps

• Management structure: directors and officers manage C Corporations.
• How do C corps file taxes? The company pays tax on taxable income as well as shareholders that pay personal tax on income reported on Schedule K-1.
• Legal protections C corps: This structure protects all individuals involved in the business from a lawsuit and creditors trying to seize personal assets as the company is liable for all legal and financial obligations.
• Do C corps need to register their business name? To operate using a specific business name, a business owner must register that name with their state's secretary of state when they file their articles of incorporation.

Pros And Cons Of C-Corporations

Advantages:

• One thing to consider, especially if you intend to grow your business significantly and invest profits back into the company, is that a C Corporation only pays taxes on those profits distributed to their shareholders.
• You are not held responsible if your business falls into legal trouble.

The Cons

• This structure is often overly administrative for the average small business. In addition, it requires a formal structure of shareholders, directors, officers, and employees.
• Each corporation needs to appoint at least one person to serve on the board, and the officers need to oversee the business’s day-to-day operations.
• If you are the corporation owner, you will need to file both your personal taxes and taxes for your small business. In turn, this can result in “double taxation,” which means that the business pays taxes on any profits, and the owner pays taxes on distributed profits.

HOW TO BUILD A BRAND TO TRANSFORM YOUR SMALL BUSINESS

What Is An S-Corporation?

If you opt for a Corporation, there are two types: a C Corporation (explained above) and an S Corporation. Some small business owners will form an S Corporation to sidestep this double tax burden. This means that the business does not file its own taxes. Instead, profits pass through the individual taxes of the shareholders. Suppose any of the shareholders are employees of the company. In that case, the business must pay a fair wage to those employees, aside from their profit shares and payroll taxes on the aforementioned wages. Additionally, it is crucial to remember that not all C Corporations will qualify for S Corporation status. For example, an S Corporation cannot have more than 100 shareholders, and they must all reside in the United States.

#DidYouKnow A legal formation is also called “business structure” and “legal structure.”

When To Use This Structure

Business owners choose an S Corporation over a C Corp to avoid paying both corporate and personal taxes. Likewise, the business pays ½ of self-employment tax rather than the total amount paid by sole proprietorships and partnerships. If you need to receive a steady income, S Corporations require that business owners receive reasonable compensation compared to others in their industry.

Formation And Compliance Requirements

The corporation must file Form 2553 with the IRS and meet and agree to these IRS S Corporation requirements:

• Domestic corporation, no more than 100 individual, trust, or estate shareholders, one class of stock, or it can't be an ineligible corporation (examples: specific financial institutions, insurance companies).

Notation from the form's instructions:  "If you check box Q1, you will be charged a user fee of $5,800 (subject to change by Rev. Proc. 2018-1 or its successor)." Also, states usually require that you file articles of incorporation with the secretary of state with fees averaging between $100 to $250. Your state may also charge an annual registration fee. If you use an attorney to incorporate your business, expect to pay $500 to $700+.

More About S-Corps

• Management structure: Directors and officers manage S Corporations. Directors make significant decisions, and officers manage daily operations. Shareholders have no management authority.
• How do S corps file taxes? Taxable income passes to the individual shareholders of S Corporations, and they report the income on their personal tax returns.
• Legal protections for S corps: Owners and shareholders' personal assets have protection from creditors and anyone that could sue the business. Unless a shareholder signs a personal guarantee, they aren't personally responsible for the corporation's debts and liabilities.
• Do S corps need to register their business name? When an owner sets up an S Corporation, they need to file articles of incorporation with their state's secretary of state. The agency makes sure another corporation doesn't already use the name before they register the name.

Pros And Cons Of S-Corporations

Advantages:

• The government taxes taxable income as personal income, so there's no corporate tax liability.
•  Business expenses and losses reduce personal taxable income.
• The structure provides the owners the ability to raise capital by selling stock.
• Business owners receive a salary to manage the business operations.

Cons:

• S Corporations have a limit of one class of stock.
• Others can seize or sell stock shares.
• Investors avoid making investments in S Corporations because they are less-attractive options.
• A requirement is regular meetings with shareholders.

What Are the Most Common Types of Business?

What Is An LLC?

A limited liability company (LLC) is essentially a hybrid of a C Corporation and a sole proprietorship. So, to understand the difference between sole proprietorship vs. LLC, the answer would be: it depends. Here are some pros and cons of this business structure:

#DidYouKnow This is generally the most popular structure among small businesses.

When To Use This Structure

A business structured as a Limited Liability Company provides personal liability protection for a business owner's personal assets against a lawsuit or non-payment of debts. Banks, creditors, and customers view LLCs as a more credible and reliable provider of goods and services.

Formation And Compliance Requirements

Here's how to set up an LLC:

1. You must register your business name with your state's corporation commission and verify that the name isn't in use.
2. States usually require that you appoint a registered agent, apply for a business license, file LLC articles of organization, set up an operating agreement, and meet your state's employer requirements if you have employees (reporting wages and paying payroll taxes).

Average registration costs range between $40 to $500.

More About Limited Liability Companies

• Management structure: Managed by either single or multiple members and managers.
• How do LLCs file taxes? Taxable income passes to the LLC's members, that pay Federal and self-employment taxes on the income.
• Legal protections for LLCs: A Limited Liability Company structure protects its members' personal and LLC assets from liability due to unpaid debts or actions by owners or employees.
• Do LLCs need to register their business name? Yes, you should follow your state's protocol to register your business name.

Pros And Cons Of LLCs

Advantages:

• Much like a corporation, it protects the owner’s personal assets without requiring the same level of administrative oversight or paperwork to file.
• You have more tax flexibility: you can choose to pay taxes as a C Corporation, where the business files taxes separately, or as an S Corporation, where the profits pass through to the owner, who then reports them on their personal taxes.
• Every state has its own laws regarding forming an LLC; however, no state requires a business to form an LLC. Rather, it is entirely voluntary.
• Owners are not considered employees but members. As such, they do not have to pay Social Security or Medicare taxes on their profits.

The Cons

• If you actively work in the business and earn a salary, then you will need to pay self-employment taxes on that income.
• If your small business employs paid staff and you commit to offering competitive benefits. IT's expected of an LLC will to pay taxes on certain benefits, such as health and life insurance.

With The Correct Business Structure, Success Awaits!

Just as every small business is different, so will the best option for said business. And, yes, as your company grows and changes, you can change the structure. Consulting a respected, trustworthy tax attorney or business advisor is an excellent first step in determining which one is the best option for you.

Once you’ve decided which legal structure and name you’ll choose for your business, the next step is to keep strengthening your business.

The best way to do it is by subscribing to Camino Financial's newsletter. By doing so, you will receive, directly into your inbox, the best resources to grow your business. ADD_THIS_TEXT