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)
Learn more about C corporations
- 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).
- An S corporation might be the right business type for you if:
- You want to take advantage of benefits that the corporate business type holds, but you want to take advantage of pass-through taxation
- You want flexibility to set salaries for employee/owners to minimize
- Social Security and Medicare taxes
- Flexibility of accounting methods is desired, because corporations must use the accrual method of accounting unless they are considered to be a small corporation (with gross receipts of $5,000,000 or less) and S corporations typically don’t have to use the accrual method unless they have inventory Lower risk of IRS audit exposure is desired, because S corporations file an informational tax return (Form 1120 S U.S. Income Tax Return for an S Corporation) and 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)
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.
- An LLC might be the right type of business for you if:
- Your startup company anticipates losses for at least two years and you want to be able to pass the losses through to yourself and the other owners
- Flexibility for accounting methods is desired, because LLCs are not required to use the accrual method of accounting as C corporations typically are
- Your business may own real estate
- You want management flexibility, since LLCs offer more flexibility than corporations in terms of how the management of the business is structured You wish to minimize ongoing formalities; unlike corporations, which are required to hold annual meetings of directors and shareholders and keep detailed documents and records for all corporate meetings and major business decisions, LLCs do not face strict ongoing meeting and documentation requirements
- You want flexibility for sharing profits among owners
Advantages & limitations of a C Corp, S Corp, and LLC
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.
Other considerations: state selection
Most people opt to incorporate or form an LLC in the state in which their business operates. However, you are not required to do so; you can choose from any one of the 50 states or the District of Columbia (DC). You may want to consider which state is right for you to weigh any potential advantages or disadvantages. Remember, if you incorporate in a state other than the state where you operate your business, you may be required to register to transact business (foreign qualify) in the state where you operate, which results in paying registration and ongoing fees/taxes to both the state of incorporation and state of qualification.
Choosing an entity type
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. As you decide which business structure is best for you.