Incorporation and Filing DBA Papers

Sole Proprietorship, Limited Liability Co., or Corporation - Choosing the Right Option

Save to My JumpUp Email to a Friend

Rating: ( 8 )

Pretty good

Finding the right business structure to match your business

What kind of new business do you plan to start? Sure, you know what your business will do, but for tax and legal purposes you also need to figure out how to structure your company. It's a pretty important consideration, because you'll be thinking about how much liability protection you need, as well as how much paperwork you'll have to do.

Below you'll find information about defining your company as a sole proprietorship, partnership, limited liability company (LLC), or corporation. Along with business structure, you also need to know whether you're required to register your company name, and where to go to file this information. Below you'll find an overview of the kinds of business structures to consider and a guide to who is required to file a fictitious business name or "doing business as" (DBA) statement.

Sole proprietorships and basic partnerships keep structure simple

For many new businesses, the best initial ownership structure is often either a sole proprietorship or a partnership. A sole proprietorship is simply a one-person company. Usually you don't have to do anything special or file papers to set one up. You can generally consider this a done deal as soon as you go into business for yourself. In fact, from the moment you say, "Hey, I'm in business for myself," you can think of yourself as being the sole proprietor of a new venture. If you own the business with someone else, then a partnership may be the answer. This simple arrangement usually doesn't require filing paperwork, either. The arrangement begins as soon as you start a business with another person.

As far as the law goes, sole proprietorships and partnerships are one and the same as the people who own these businesses. As the owner of one of these companies, you report business income and losses on your personal tax returns, and are personally liable for any business-related obligations, such as debts or court judgments. That's why a sole proprietorship or partnership can be an easy way to start a business if you don't think personal liability will be a problem, or if your business insurance seems likely to cover potential problems.

Limited partnerships may be limiting

You may have heard of limited partnerships, which are a little more complicated. Think carefully before choosing this option. Limited partnerships are typically created by one person, called the general partner, who arranges investments from other people, called limited partners. Because these relationships between the general partner and the limited partners can be very complex, it may make more sense to have people involved with your venture either pony up cash as investors or join you as regular partners.

Incorporation options are more complex but offer more protection for owners

Incorporation makes sense for many entrepreneurs because it protects you, the business owner, from having your personal assets - such as your home, personal bank accounts, and vehicles - put at risk if something turns sour. In legalese, this concept is known as "limited liability."

Typically, there are three incorporation options available for business owners:

• C-corporation: You can think of a C-corporation (the technical name for a regular corporation) as having just about the same legal and tax status as a person. Owners don't use their personal income tax returns to pay tax on corporate profits. The corporation itself shells out the cash to the government, often at a lower rate than what the owners of other kinds of businesses pay. Setting up and running a corporation, however, means a fair amount of paperwork and formality, such as completing forms covering officers of the company and recording minutes of regularly scheduled meetings.
• LLC (limited liability company): Like corporations, LLCs provide limited personal liability for business debts and claims, which can be a real help for a new business. But when it comes to taxes, LLCs are more like partnerships, because owners report business income on their personal tax returns. This arrangement doesn't require as much formal structure as a regular corporation, which is one reason why it can be a good choice for a new business.
• S-corporation: Like an LLC, an S-corporation provides all the limited liability of a regular corporation, while the owners are also taxed for business income. But unlike an LLC, S-corporations must first be regular corporations before applying for this unique tax-paying status - and continue following all other corporate regulations. All of this translates into a business structure that requires careful consideration and even expert advice before starting.

Making your business structure official

If you start your business as a corporation, LLC, or limited partnership, you'll need to file organizational documents such as articles of incorporation with the right office in your state. Depending on the state in which you form your business, this will run you anywhere from about $80 to $800, and you'll be asked to show proof that you have officers running the company with titles such as president, vice president, and secretary. Many states have the appropriate forms and sample documents online. The actual filing is usually done through your state's department of corporations or secretary of state's office.

There's nothing phony about a fictitious business name

You may not have to do any filing if you're planning to start a sole proprietorship or a partnership. But even if this is your plan, you should investigate whether you need to apply for a fictitious business name. The owners of other kinds of businesses - such as corporations and LLCs - will certainly need to file a fictitious business name statement. This fishy-sounding term is also known as a DBA, which is short for "doing business as," and is simply the operating name of your business. Unless your business name is the same as your own personal name, you will probably need to file a fictitious business name.

The reason for a DBA, as far as the government is concerned, is to keep track of companies in the event of a complaint or legal problem. But a DBA is more than just a way for complaining customers to identify a problem business. For example, you can't enforce any contract signed under your business name unless the name is registered. Plus, you usually need to have a fictitious business name for other licenses and permits. The registration process is very straightforward and is usually handled by the county clerk in the county where you plan to start your business. Once this is taken care of, you can do things under your business name, like open a business checking account.

Business structure isn't set in stone

As you've seen, the way in which you plan to run your new venture will probably determine your business structure. It may be helpful to think of these pros and cons while you decide the legal status of your new venture:

• The liability protection/paperwork trade-off. Do you think your business will incur enough risk for an LLC or corporation structure? Or will the extra paperwork be unnecessary for what you plan to do, and make a sole proprietorship (or general partnership) the better choice?
• The tax advantage/tax complexity trade-off. How much do you need the tax advantages of an LLC or corporation structure when you're starting out?

But keep in mind that none of this is set in stone. You can always change the business structure of your company. Your company can start out as a sole proprietorship or general partnership. Then, when the time is right, you can convert your business to an LLC or limited partnership. Or you can change your LLC into a regular corporation. The important thing is to establish the business structure that suits you best at the outset, because this will help you through the initial stages of getting your venture up and running.

Related Myth Blasters

Business Structure