Having a good knowledge of the various types of business structures is important before setting up a business. It helps you determine which structure would best fit your business and enable it to scale quickly and fulfill its potentials.
Here, we examine two key ways to structure your operations to protect your business from liability: the DBA and the LLC.
A limited liability company, unlike a sole proprietorship, is a legally distinct company from the personality of the founder(s). By the way, the ‘owner(s)’ of an LLC are referred to as members.
These members are not personally liable for the company’s liabilities, such as debt. After all, the company is a distinct person in the eyes of the law. This makes LLCs similar to corporations but unlike the latter, LLCs enjoy a more flexible tax structure.
Practically, an LLC is a hybrid structure. Unlike C corporations where the company pays tax as do the owners on their income. LLCs can choose to pay taxes or not. Although, if the company does not, the members would still report the company’s profit or loss in their personal tax returns. Some of the biggest companies in the US are LLCs, including Google (which was formerly a corporation).
Because of the flexibility of requirements of an LLC, the members can be individuals, partnerships, corporations, or even another LLC. likewise, unlike sole proprietorships, members don’t have to be citizens of or even residents in the United States.
Notwithstanding the flexibility in the LLC structure, LLC formation requires extensive paperwork, as against sole proprietorships and DBA filings. The Articles of Organization are the main legal documents required.
Besides basic information about the business and its owners (members), the Articles also include the nature of the business, statement of purpose, details of a registered agent, etc. A supporting document, the Operating Agreement, determines the equity and management structure.
Benefits of an LLC
- Limited liability. This is the main benefit LLCs offer. Business owners cannot be personally responsible for the company’s debt and other liabilities as it is a separate legal entity. Even if the business goes bankrupt, the member(s)’ assets remain secured.
- Flexibility. Being a hybrid type of company, LLCs are allowed a lot of flexibility in how the business is actually structured. In fact, LLCs can determine how they want to file their taxes with the government.
- Tax expenses reduction. Business owners (LLC members) are not subject to double taxation. C corporations must file taxes separately and also have their owners file taxes that include their income from the corporation.
- Investment. LLCs are attractive to foreign investors because company members don’t have to be residents or citizens. Besides, members can, unlike in a partnership, get involved in the running of the business without risking their limited liability privilege.
- Simplicity. LLCs require much less formality and paperwork than corporations, which must have a board of directors, shareholders meetings, proportional income distribution according to shares held, etc.
Limitations of an LLC
- An LLC does not enjoy perpetuity in the way corporations do. An LLC may be automatically dissolved if a member dies or becomes bankrupt, especially when the Operating Agreement does not specify what happens in case any of the events occur. What LLCs enjoy is closer to indefiniteness than perpetuity. In any case, these regulations vary by state laws.
- Though owners of an LLC don’t have to pay taxes on the LLC income per se, they may still be technically subject to double taxation in the form of self-employment tax.
- Because LLCs operate according to state rules, regulations often vary. This can complicate issues sometimes.
Likewise, LLCs are still relatively new in the business world; so, many rules and regulations guiding the operations of LLCs are still quite evolving. More importantly, you should have an attorney at hand when forming an LLC, either by yourself or with a partner(s).
A DBA, known as ‘Assumed Business Name’ is a company’s trade name; that is, a fictitious name with which the company operates other than the legally registered company name. A DBA is most often used by sole proprietorship companies but also by LLCs, corporations, and partnerships.
Though a DBA name is different from the company’s legal name, most states still require some filing for the DBA, mainly to protect the company’s customers/clients.
Why would you need a DBA?
Not all businesses need a DBA. In fact, there is no legal consequence for not filing for a DBA unless you are operating an unregistered business.
Most DBAs are filed by sole proprietors. Understanding what a DBA means and how it works is not difficult. Sole proprietors need to file for a DBA if they start a business with a name different from their given name. For example, a Jerome Wheatly who wants to start a coffee business would be registered as Jerome Wheatly doing business of Cafe Pop (or whatever business name they use). However, a DBA is not required if the business name includes their full name, for instance, Jerome Wheatly’s Cafe.
Corporations don’t need a DBA at formation. However, some file for one when they form a new business unit or product line that is different from the company’s main offering(s).
Benefits of a DBA?
- Whether for a sole proprietorship or an LLC or a corporation, the principal benefit of a DBA is that it limits paperwork and expenses (both registration costs and taxes).
- As a sole proprietor, filing for a DBA helps you to distinguish your personal identity from your business brand without forming an LLC or a corporation, both of which have more requirements for registration and pay higher taxes.
- LLCs and corporations can create and operate multiple businesses without having to register each one differently. Also, since a business can file for as many DBA as they want, it can use the different names to launch multiple products or even target different markets.
- Filing for a DBA offers protection from financial liability and legal consequences an individual, LLC, or corporation may incur by doing business under a fictitious and unregistered business name.
- Banks sometimes require a DBA from sole proprietors before they can open a business account or be granted a loan.
Limitations of a DBA
- In certain states, filing for a DBA does not protect that business name. Normally, when you register your company as a sole proprietorship, corporation, etc. no other person(s) can register their business under the same name. A DBA does not always offer the same protection; you need to check your state regulations concerning this. This may cause brand identity problems if your business name is used by another company. However, to secure your DBA trade name, you may register it as a trademark with the US Patent and Trademark Office.
- Filing for a DBA does not make the business incorporated, an LLC, or a corporation. Therefore, you can’t add ‘Inc.’, ‘LLC’, or ‘Corp.’ after your business name. A DBA does not make your business assume the privileges of these other types of businesses.
- Filing for a DBA does not grant you tax benefits that LLCs and corporations enjoy. When you file for a DBA, you merely register to operate under a business name. That name is not a unique business identity.
- Some entities, including banks, insurance companies, and non-profit organizations are prohibited from being LLC members.
Filing for a DBA
- Businesses that are not sole proprietorships may be required to obtain a Certificate of Good Standing from the designated government official before they can file for a DBA.
- You might be required to post a newspaper ad to publicly announce the business name. A DBA does not make you anonymous; it only removes some of the legal complexity of registering a business.
- If you are a sole proprietor filing for a DBA in order to separate personal finances from business finances, it would help if you applied for an employer identification number, as against associating your social security number with your business.
- It is obligatory to regularly renew your DBA as well as update registration information when the business’ status changes.
It is already clarified above that a DBA is not an actual business structure, but an operating name. In terms of business structures, there are three other broad types besides the limited liability company.
This is the simplest business structure as well as the most common. A sole proprietorship is a business owned by a single individual. Although one individual may be the owner of other types of businesses, such as an LLC, a sole proprietorship is distinct in that it does protect an owner from personal responsibility for the business’ debts and other liabilities. Likewise, a sole proprietorship does not pay tax. In the eyes of the law, the business and the owner are one and the same. So taxes for the business are filed as part of the owner’s personal income tax.
A partnership is basically structured like a sole proprietorship, except that it is owned by two or more persons. A written agreement is often required to determine what each person’s contribution would be and how company profits/losses would be shared. According to the Internal Revenue Service, “a partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax.”
Corporations have a higher formality of formality and have a more complex business structure than other formats. There is limited liability for the owners, who are known as shareholders in this context. In this way, the company exists more independently from its owners than an LLC does from its members. Shareholders hold a percentage of the company’s stock, that is, its capital. Corporations are subdivided into C corporations and S corporations. The difference is that S corporations can avoid double taxation by passing profit/losses to shareholders. However, they are more limited than C corporations. Microsoft, Apple, AT & T, and Tesla are corporations.