Types of Corporations for Your Small Business
If you are looking to incorporate your small business, you may be overwhelmed by the various options available to you. From limited liability companies (LLCs) to S corporations to C corporations to DBAs (Doing Business As) company, each type of company has its own advantages and disadvantages. Understanding the basic features of each type of company is essential to deciding which is best for your business. A skilled corporate attorney may be able to provide you with additional advice and counsel about incorporation in your state.
DBA, or Doing Business As Companies
If you are a small business owner that would like to operate under a different name, then a DBA company might be the right choice for you. A DBA (also known as a Doing Business As, or an assumed or fictitious business name) is a type of filing where a company can perform business using a different name than its legal name. This filing is often done at the county level, but it may also be filed with your state. Check with your state Department of Corporations or with your attorney to determine where you will need to file a DBA filing.
The main advantage of a DBA filing is that it will allow you to conduct business using a different name without requiring your business to comply with the additional filing or ongoing paperwork requirements of incorporating or forming another type of company. This could be beneficial for a number of reasons. For example, if a new competitor has a similar name, you may want to do a DBA filing in order to differentiate yourself. Alternatively, you may want to do a DBA filing if your business has received some bad press and you want to distance your company from it. Your original business will remain intact; you will simply be able to transact business using the new name using the DBA filing.
However, because a DBA filing does not change the status of the underlying company, it does not provide any additional protections to your company. If your company were sued, a DBA filing does not give you any protection from liability. Similarly, there are no tax advantages to a DBA filings. The only benefit to a DBA filing is the ability to conduct business using a different name. While there many be many practical reasons for doing so, there are generally not legal advantages for DBA filings.
Limited Liability Companies
If you want to more formally establish your company, then you will need to file documents with the appropriate state agency. A limited liability company, or LLC, is one option for doing so. LLCs are formed under state law through what are known as Articles of Organization. As the name indicates, limited liability companies tend to limit the liability of those who organize them — that is, the owners of the business. That makes LLCs a good option for anyone who is concerned about potential personal liability connected with their business.
When you form a LLC, a business entity is created — the limited liability company. As long as certain procedures are followed, then your business will be held responsible for its own liabilities. That means that if something should happen that leads to a lawsuit, it will be the business that is sued — not you personally. Consider a situation in which you own a home construction company. If you incorporate it as a LLC, then you have personal liability protection. If you install a deck at a customer’s house and that deck later collapses, causing serious injury to the homeowners, then the owners will likely only be able to sue the company — and not you personally. That is one of the primary advantages of a LLC: protection from personal liability. Of course, there are situations where you may be held personally liable for certain conduct; a skilled business law attorney can advise you on your responsibilities as the owner of a LLC.
Another advantage of a LLC is that there are certain tax deductions available to LLCs. In addition, forming a company such as a LLC may make your small business seem more credible to customers, vendors and potential partners, allowing you to better market and expand your business.
However, there are some drawbacks to the LLC option. For tax purposes, business and income expenses “pass through” to the owners personal tax return. This means that the owners are considered self-employed individuals and will owe Social Security, Medicare and self-employment taxes. There are also some costs associated with starting a LLC, including filing fees, attorneys’ fees and ongoing compliance with state reporting requirements.
For small business owners, a corporation is often the preferred legal entity choice given its protection from personal liability. A corporation is a separate legal entity that is establish under state law. A S corporation is formed by filing Articles of Incorporation with the appropriate state agency, typically in consultation with a corporate or business law attorney. A S corporation is a popular choice for small business owners, as it is typically less complicated to set up and has fewer reporting requirements.
With a S corporation, there is a high degree of personal liability protection. As with LLCs, this means that if a person or entity is harmed by the business in some manner, the lawsuit will be filed against the business and not against you as the small business owner. For example, if your business runs an advertisement that a competitor believes harmed their business, that competitor may file a lawsuit against you. Being incorporated means that the lawsuit should be filed against the company and not against you personally — which protects your personal assets.
Like LLCs, taxes in S corporations “pass through” to the owners. Profits and losses are reported on your personal tax returns, and the corporation itself will not pay taxes. This can greatly simplify the accounting and finances of the corporation itself, although it can make it more costly for you as a small business owner. Shareholders of S corporations are considered employees, so Social Security and Medicare taxes must be taken from the compensation that they receive, but not to the distributions that they take from company profits. There are tax advantages of forming S corporations, and being incorporated can assist a small business in gaining credibility, raising capital and expanding its business.
For larger business, C corporations are a great option for incorporation. C corporations are a separate legal entity that are formed by filing Articles of Incorporation with the appropriate state agency. Unlike S corporations and LLCs, C corporations are separate tax payers, so that its profits and losses are taxed to the company, and not to the individual business owners. Profits from C corporates that are released as dividends are then taxed as personal income when the owners receive them, creating what is an effective double tax — the corporation has already paid taxes on the profits, and the owners will pay taxes on the profits again once they receive them as income. This is the main disadvantage of incorporating as a C corporation, which is why many small business owners do not select this form of incorporation.
Like S corporations and LLCs, C corporations provide personal liability protection. They also establish a business as a thriving entity, and can assist a company in gaining customers and in developing credibility with vendors, partners and potential employees. There are also potential tax advantages available to C corporations, such as tax deductions. However, the double taxation of profits may outweigh these tax features; an experienced tax attorney or accountant can advise you of the advisability of choosing a C corporation based on the tax benefits for your small business.
Choosing a form of incorporation for your small business can be complex, and depends on a number of factors, including the type of business, your location, your tax situation, and your goals. A basic understanding of these various types of corporate forms can help you make a decision about what type of corporation might be best for your business, but consulting with an attorney or an accountant is usually recommended to help you make the best decision for your specific situation. An expert in your jurisdiction can help you thoroughly analyze your business’ goals and choose the optimal corporate form to suit your business’ needs.