What business form to put down when filing a DBA
Your entity menu consists of the following:
- Sole Proprietorship
- General Partnership
- Limited Partnerships (LP)
- C Corporation
- S Corporation
- The Professional Corporation
- Limited Liability Company (LLC)
Please note: There is not one “do all, end all” business entity type that is right for all situations. Sorry, but every situation is different and may require a particular business type that is more beneficial in your particular circumstances than other entity types. How do you know which entity type is best for you? This is a major area of importance whereby you must seek “ legal counsel” and do your own due diligence. There is probably no area of business planning that I have seen that people make the wrong decision than the area of the type of entity option. Seek “wise counsel”.
The following descriptions are meant to be general guidelines, not a comprehensive study of all ramifications
1. Sole Proprietorship: The best advantage of operating a new business as a sole proprietorship is that it is easy to do and does not require any formal action to set it up. You can start your business immediately as a sole proprietorship – there is no need to wait for an attorney to draft and file documents or for the government to approve them.
Of course, you may need an industry specific business license, and a few states require you to sign up on a registry to do business. On the county level you can register the name of your business as a D.B.A (Doing Business As).
When you run your business as a sole proprietorship, you are the business. As the owner, you will be personally liable for any debts or taxes of the business or claims, such a legal damages resulting from a lawsuit. This is the main reason why many entrepreneurs opt for a different form of entity.
As a sole proprietorship, the business’ income and deductions are filed on Schedule C attached to your Form 1040. You also pay self-employment tax on your business net income. Their are many benefits however when it comes to small business tax deductions. It would be wise to investigate these tax deductions in advance of your business formation choice.
2. The General Partnership: When you enter into an agreement (verbal or written with another party to do business together) you are acting in Partnership with one another. The business is operated as if it were one person. This is like the sole proprietorship, except with twice the exposure. Each is responsible for everything each of you own, owe, do and have done. You have joint and several liabilities with your partners. This means you are completely liable for everything, whether you are involved or not. The partnership files a separate tax return Form 1065 and each partners’ respective income flows to their personal return via a K-1.
Partnerships are a bit like marriages; they usually start out with a great deal of trust but have a high ”divorce” rate. Be advised that partnerships are easy to get into, require a lot of patience and understanding to live with, and are often costly and painful to get out of.
3. Limited Partnerships: LPs are pass through entities that have the same basic characteristics as a general partnership expect that the LP has limited partners who typically have neither liability for business activities nor management responsibilities. These limited partners are liable or at risk only to the extent of the amount they have invested in the LP. The general partner, having responsibility and fully liable for the activities of the partnership, provides full direction and management of the LP.
The LP files a separate tax return Form 1065 and each partners’ respective income flows to their personal tax return via a K-1. The general partner, however, may be an entirely different form of entity and reports its respective share of income via a K-1, also.
4. The Corporation: A Corporation is a separate legal entity overseen by state law. It operates through its bylaws as well as resolutions written and adopted by its shareholders and directors. It must not function as the alter-ego of its stockholders. In other words, the people who own the business must remain separate from your corporation. Corporate formalities (the flow of activity and paperwork) must be followed to maintain a corporation as a separate legal entity. The main reason most businesses incorporate is to limit owner liability to the amount of money invested in the business. The Corporation files its own tax return (Form 1120) and pays its own taxes on the business net income.
5. The “S” Corporation: The first thing to understand about S Corporations is they are just like any other corporation in terms of corporate law requirements, limited liability of shareholders and all other corporate aspects, except regarding tax treatment. Once a corporation has elected to be treated as an S corporation, its shareholders will generally report their share of the corporation’s taxable income on their personal tax returns. The S Corporation files Form 1120S, and each shareholder respective income flows to their personal return via a K-1.
6. The Professional Corporation: Although most of us consider ourselves a professional in our field, there are select groups that the IRS considers “professional”. These professionals of health, veterinary services, law, engineering, architecture, accounting, actuarial science, performing arts, or certain consulting services are admired so much that when incorporating, they are required to file as a Professional Service Corporation (PSC). This PSC is also admired with its own flat tax rate of 35%. ( Yikes!) Your options for relief as a PSC are few but effective. The S Corporation is a viable alternative.
7. The Limited Liability Company (LLC): The LLC is a relatively new form of business organization that offers advantages and benefits not otherwise obtainable when operating as an S Corporation or partnership. The LLC combines the corporation characteristic of limited liability for all investors with the income flow-through attributes of a partnership and offers flexible allocation of profit and loss.
As an LLC, you have to elect how to be taxed:
- Proprietorship (Available to only single member LLC)
- C Corporation
- S Corporation
Please note: Do your due diligence in choosing the proper legal and tax form of business entity. Some business structures can create unnecessary taxes. It would be very wise to investigate all of the small business tax deductions that are available. Also, keep in mind that you may want to and be able to change business entity types during the duration of your company . Last but not least , you should also consider the tax ramifications within your chosen entity type of your “exit strategy”.