Founding a company can be thrilling, exciting, and overwhelming at the same time. The small-business world is an exciting place to be, with fresh ideas and company strategies leading to unbounded innovation. Taking the proper steps to create a stable and viable young firm starts with many decisions. One of which is determining whether the organization is either a “limited liability company” (LLC) “corporation,” or “doing business as” (DBA).
Taxation is the crux of the matter when it comes to how companies define themselves. Getting properly registered with the authorities is a critical early step. No business owner wants to find his or her new venture running afoul of the government, never mind at its moment of creation.
Fortunately, the U.S. Small Business Administration and Internal Revenue Service are clear about the meanings of the various terms they use. The following is a roundup of the practices associated with forming LLCs, corporations and DBAs, as well as what these different terms mean.
Limited liability company (LLC)
When a founder wants to create a corporate structure that will protect personal assets from financial liability due to business decisions, but doesn’t want to commit to the complexity of a full-scale corporation, the LLC is a valuable choice. The Small Business Administration (SBA), noting that LLC foundation is slightly different depending on which state the new entity is created in, added that these organizations are ways to gain the protections granted to corporate shareholders without necessarily forming a full-scale independent body.
The SBA added that there are several benefits to operating as an LLC, as well as a few drawbacks. Perhaps most prominent among the positives is that smaller LLCs that don’t rise to corporation scale are easier and more affordable to establish and begin operating. With less paperwork to file with state authorities, it’s easy for a founder or partnership to get going at once.
Furthermore, once these partners have started their operations, they are free to distribute their profits in more flexible ways than they would have access to under more developed corporate structures. Agreements among the founders of the company divide up the take from the LLC’s activities based on what they have put into the business, whether that is capital, time or effort.
Of course, there are disadvantages to go along with the benefits. LLCs members are self-employed according to tax law, so despite the fact that the LLC structure is not necessarily an independently taxable creation, the participants in the company are subject to self-employment taxes that contribute to Medicare and Social Security.
Furthermore, there is a chance that LLCs will dissolve if and when members leave, forcing the others to re-set the structure of the company. The SBA noted that the operating agreement that announces the foundation of an LLC can contain provisions for what to do when founders depart, but that the default in some states is dissolution if individuals exit the partnership.
The IRS gave a few more stipulations. For instance, financial businesses such as banks and insurers can’t be LLCs. The exact status of an LLC in the eyes of the tax administration depends on how many people are involved – a one-person LLC is part of that individual’s taxes, one with two-plus is a partnership or, in case it files the extra paperwork, a full-on corporation.
A C Corporation, or simply a corporation, is its own entity for purposes of taxation. This is an independent business with shareholders, who enjoy the same level of liability protection as the members of an LLC. The SBA noted that the expanded level of complexity associated with a corporation is both the attraction and drawback of forming such a business. On the positive side, this is the kind of company that is free to grow and become established. On the negative, it’s more expensive and time-consuming to take this kind of leap into the world of business ownership.
As with an LLC, corporations are registered with the states they are founded in, as opposed to the federal government in general. This means there is room for a little variation in the laws surrounding foundation. Individuals going through the steps of creation have to ensure they are in line with their states’ agencies – some may call for actions such as immediate issuing of stock certificates to the organization’s shareholders.
A corporation, unlike an LLC, is by definition its own entity, which can be taxed and is held liable for its own debts. Founders who hope to go public, selling shares in their companies to investors at large, have to go with the corporate structure to do so. The corporation designation, with its greater commitment and potential for growth and investment, has its own set of positives and negatives noted by the SBA, which make an interesting contrast from the traits that come with an LLC.
The benefits of being a corporation include appeal to potential employees. A company that is a full-scale corporation has the ability to offer benefits that smaller entities cannot, and the potential use of stock to attract high-quality hires is another item in the owners’ toolkit. Stock is also central in capital generation by a corporation. Selling shares in the organization is a direct infusion of cash that can keep the business strong and growing.
Inevitably, taxation is another major issue for corporations. Corporate founders may find that the tax rate that applies to these companies is much lower than it would be if they were paying personal income tax on everything the firm makes – the setup that could face them if they run a non-corporate LLC. Of course, they do have to pay income taxes on the money they receive from their work with the business, but not the rest.
Of course, the corporation designation isn’t always the right choice for a small business. The disadvantages include the fact that it takes major investments of time and money to get this kind of company off the ground. The fees for running such a complex business are greater than those attached to an LLC, so leaders will have to think carefully before incorporating. This comes along with extra records to keep and papers to file. Furthermore, the potential for taxation when the firm earns its profits and then when the money goes to shareholders is something to keep in mind.
The IRS noted a few details of corporations’ operations in the tax realm, specifying that the same rules that protect shareholders from liability also stop them from taking a deduction when their corporations lose money. On the other hand, there are extra possible deductions available to corporations above and beyond those that apply to sole-proprietor LLCs.
Doing business as (DBA)
Associated with both of the aforementioned company types is the DBA. This is the name an organization trades under. Rather than a separate kind of business, this is a moniker that is applied to an LLC or corporation that allows it to operate under a name other than what it is founded as. The SBA noted that any kind of name other than the legal name a founder has registered a business under is a DBA, something that needs to be cleared with the authorities – it should be noted, however, that this process is handled by state authorities and isn’t called for in all states.
Founding a company means assigning it a legal name, which begins as the name of the founder. The SBA specified that anything else the company calls itself is a DBA, even if the founder’s name is right in the title. The process of creating a DBA is handled by the regional government, county or state, depending on location. The process of submission has to occur when beginning a new firm or any time an organization renames itself.
As opposed to the above definitions, a DBA does not have any tax or operational baggage. It is simply anything used as a moniker that isn’t a founder’s personal name. Just about every company that actively does business will have one, whether it’s an LLC or a full-scale C Corporation.
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