What is the Difference Between dba, Sole Proprietorship, llc and Corporation?
What is the Difference Between dba, Sole Proprietorship, LLC, and Corporation? – Before starting a business, as a legal requirement, you must decide the type of legal structure you want for your company, also called legal formation or structure of your business. Sole proprietorship vs DBA, LLC, and Corporation. Which of the best suited to your circumstances?
Each legal structure has different characteristics, advantages, and disadvantages, and choosing the right one for your business will allow you to manage three essential elements: liability, taxes and complexity. The good news is that you do not need to be a lawyer, or have previous knowledge, to decide on the type of legal training you want for your company. It may take more or less time and more or less money, depending on the structure you decide.
Table of Contents
What is a DBA?
Before delving into the legal structures, it is essential to understand the term DBA.
DBA is an acronym for ” Liability Business As ” and refers to the difference between the legal name of the company and the name under which it operates on a day-to-day basis: the name by which the company is made known to the public (that is, the DBA). Some situations, such as California and Florida, require businesses to register the DBA’s name before the container commences.
A DBA is not a legal edifice (the legal system is sole proprietorship). Still, a way to allow an individual company to have a trading name without filing an LLC or Corporation. While it is simple and inexpensive, it carries the same risk as being a sole proprietor or a general partnership.
What is a sole proprietorship?
Unless you choose otherwise, your company will be structured as a sole proprietorship, meaning there is only one proprietor. This is the most straightforward business construction to form.
If you are self-employed or, as mentioned above, have not yet determined a business structure, this is the default legal formation.
The most significant advantage of operating a sole proprietorship with a DBA is that it is straightforward to form and maintain. And, since there is no delineation between the business and the owner, the owner earns all of the income earned by the company, so there is no need to file separate taxes. One needs to keep track of the money made and file Schedule C with personal tax returns.
A sole proprietorship implies no separation between the business owner and the business. What does that mean exactly? If somebody sues your company or your small business defaults, your assets (home, cars, personal bank accounts) may be at risk. This is why an LLC and a C Corporation (or Corporation for short) are more popular business structures, as they limit the owner’s liability.
Before continuing with the other legal formations, you may want to know if it is time to convert your sole proprietorship into another type of legal formation.
What is a Corporation?
A company is considered a separate entity from its owners; therefore, the owners are not responsible for any financial hardship or lawsuit filed in contradiction to the business. This protection is often called “corporate protection” because it protects the owners’ assets.
It may seem that from a tax standpoint, a Corporation or C Corporation is not the way to go, and in many cases, that may be true. Though, one thing to consider, especially if you intend to grow your business significantly and capitalize on profits in the company, is that a C Corporation only pays taxes on profits that are distributed to its shareholders.
By contrast, members or owners of an LLC, an S Corporation (both of which will be addressed shortly), and a sole proprietorship are taxed on any profits, whether they are deposited into personal bank accounts or invested back into the business. Also, remember what we said before about the “corporate shield”. You will not be responsible if your company encounters legal problems.
This business structure is often viewed as too administrative for the average small business. The reason is that this entity requires a proper installation of shareholders, directors, officers, and employees. Every corporation must appoint at least one person to serve on the board, and the officers are required to oversee the company’s day-to-day operations.
This is generally only a good option for a small business that has been around for a while and is preparing to open to a larger audience or grow significantly.
For tax purposes, a Corporation files its taxes separate from the owner’s. As such, if you are the owner of a corporation, you will need to file both your taxes and your small business taxes. In turn, this can product in “double taxation,” meaning that the business pays taxes on any profits, and the owner pays taxes on those profits after they are received.
What is an S Corporation?
Some small business owners form an S Corporation to avoid this outstanding double load. These earnings that the business does not file its taxes, but the profits are passed through and reported on the shareholders’ taxes.
Supposing any of the shareholders are employees of the company. In that case, the company must pay fair wages to those employees, apart from its shareholder earnings, and pay payroll taxes on the abovementioned salaries.
Also, it is significant to note that not all C Corporations will qualify for S Corporation status. For sample, an S Corporation cannot have more than 100 shareholders, and all must reside in the United States.
What is an LLC?
An L LC, which stands for Limited Liability Company, is a hybrid between a C Corporation and a sole proprietorship.
There is a reason this is generally the most popular business structure among small businesses. Like a corporation, it protects the owner’s assets without requiring the same level of administrative oversight or paperwork to file.
Plus, you have more flexibility with an LLC in filing taxes. You can choose to be taxed as a C Corporation. Where the business files taxes separately, or as an S Corporation. Where profits are passed through to the owner. , which then informs them about their taxes.
Each state consumes its laws regarding forming an LLC however. Unlike the requirements for establishing a DBA, none require a business to form an LLC Instead. It is entirely voluntary and a choice the business owner makes.
If you and, if applicable, your business partners own an LLC, then they are not considered employees but members. You do not have to pay Social Security or Medicare taxes on your earnings. However, if you are actively working in the business and earning a salary. You will pay self-employment tax on that income. Whereas, with a corporation, only wages are subject to tax; profit sharing is not.
If your small commercial employs paid staff and is committed to offering competitive benefits. You must choose carefully between an LLC and a Corporation. Some benefits, such as retirement plans, are only available to corporations. While an LLC is expected to pay taxes on certain benefits. Such as health and life insurance.
With the Proper legal structure, you will achieve success
Every small business is different so it will be the best option for those businesses. And yes: as your company produces and changes, so can the structure of the business. Consulting a trusted tax attorney or business advisor is an excellent first step in determining. Which business structure best fits you?
Once you agree on the legal structure of your profession and the name, you will operate under. The next natural step is to create a brand for your company. We invite you to learn how to do it here:
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