Which Type of Business Entity to Choose?

When starting a new business, one of the first decisions to be made is deciding which legal structure your company should take.  

You have 4 choices:

• DBA
• Regular Corporation
• S-Corporation
• Limited Liability Company
   

DBA

A DBA (also known as a "sole proprietorship", "Doing Business As", or a "Fictitious Name") is a business that is not separate from its owner, merely a different name that the business owner operates under. The owner is personally liable for the company and its debt; all income is added on the owner(s) personal tax returns (pass-through taxation). If there is more than 1 owner, than the business is classified as a "partnership".

PROS: Easy to setup, easy to maintain.

CONS: Owners are personally liable for the company and its debt ( you could lose your house, cars, personal assets, etc.) in a lawsuit. Usually not recognized at the State level, only in your city/county. No corporate "prestige" of having the "Inc." or "LLC" attached to your name. LLC's have primarily replaced DBA's as the entity of choice for even the smallest businesses.

How to get Started: Prepare and file a DBA application at the city or county where you intend to do business. Click here to file your DBA online with one of our partners.

Regular Corporation

A corporation is a separate legal entity that can shield the owners from personal liability and company debt. As a separate entity, it can buy real estate, enter into contracts, sue and be sued completely separately from its owners. Also, money can be raised easier via the sale of stock; its ownership can be transferred via the transfer of stock; the duration of the corporation is perpetual (the business can continue regardless of ownership); and the tax advantages can be considerable (i.e. you are able to deduct many business expenses, healthcare programs, etc. that other legal entities are not). Income is reported completely separate via a tax return for the corporation.

A corporation is set up in this structure:

1. Shareholders own the stock of the corporation.
2. Shareholders elect Directors (known as the "Board of Directors").
3. Directors appoint Officers (President, Secretary, Treasurer, etc.).
4. Officers run the company (day-to-day operations).

In many cases (especially during the startup phase), you will be the 100% owner of the stock, therefore you elect the directors (usually yourself) and then appoint yourself as an officer (or all the officers: CEO, Treasurer, Secretary).

The rules for operating your corporation are set in what are called Corporate Bylaws. This document sets the rules for the company and can be modified as the business grows and changes. Our EasyCorp™ service includes a fully personalized set of Corporate Bylaws for your State (as well as an editable copy in Microsoft Word format) for you to modify as the company grows and changes.

Operating a corporation involves at the minimum holding a yearly Directors and Shareholders meeting (the location is determined by you and the expenses are deductible), keeping written minutes of major company decisions and maintaining general corporate compliance as dictated by the Corporate Bylaws.

Click here for Frequently Asked Questions about Corporations

PROS: The oldest, most successful and most prestigious type of business entity; provides personal liability protection; conveys permanence, can reduce taxes (lower tax rate on retained profits, items like healthcare, travel and entertainment are deductible).

CONS: More expensive to set up than a sole proprietorship or partnership; more paperwork and formality required than an LLC (holding Shareholder/Board meetings, keeping minutes and resolutions).

The Lowdown: Though more complicated to run and manage than the LLC, the Corporation is still the oldest and most prestigious form of entity. C Corporations are taxed at a lower rate on profits and are able to deduct items like healthcare, travel, entertainment, etc. that LLC's and S Corporations cannot. More complicated tax and management issues than an "S Corporation".

How to Get Started: You can start right now. We can form your corporation in any of the 50 States and D.C.

S-Corporation

After a corporation has been formed, it may elect "S-Corporation Status" by adopting an appropriate resolution and completing and submitting a form to the Internal Revenue Service (some states require their own version). Once this filing is complete, the corporation is taxed like a partnership or sole proprietorship rather than a corporation. Thus, the income is "passed-through" to the shareholders for purposes of computing tax returns.

Most new small corporations elect S-Corporation Status (90%+) so profits and losses can be added to the shareholders' personal tax returns without having to pay taxes on profits once, then again when they are given back to the shareholders as income (dividends). This is known as "double taxation" and is the reason why S-Corporations were created. An S-Corporation can also revert back to regular Corporation status fairly easily.  

There are some limitations on S-Corporations: they cannot deduct some expenses like health insurance, travel, entertainment, etc. that normal corporations can. Also, they are restricted to 75 shareholders or fewer and those shareholders must be U.S. Citizens.

Click here for Frequently Asked Questions about Corporations

PROS: Prestige of the corporation without the double taxation. Ideal for "1 person corporations".

CONS: More expensive to setup than a DBA; more paperwork and formality required than an LLC (holding Shareholder/Board meetings, keeping minutes and resolutions).

The Lowdown: Though taxed in a similar manner to LLC's, still requires the corporate formalities of a regular corporation (holding Board meetings, keeping minutes and resolutions).

How to Get Started: You can start right now. We can form your corporation in any of the 50 States and D.C.  We can also prepare the IRS Form for your corporation to elect "S-Corporation Status" as well as the required corporate resolution.

Limited Liability Company

A Limited Liability Company can be best described as a hybrid between a corporation and a partnership. It provides easy management and "pass-through" taxation (profits and losses are added to the owner(s) personal tax returns) like a Sole Proprietorship/Partnership, with the liability protection of a Corporation. It's a relatively new form of business created about 20 years ago and now recognized in all 50 States and D.C.

Like a corporation, it is a separate legal entity; unlike a corporation, there is no stock and there are fewer formalities. The owners of an LLC are called "Members" instead of "Shareholders". So in essence, it's a like a corporation, with less complicated taxation and stock formalities.

The heart of a Limited Liability Company is known as the "Operating Agreement". This document sets the rules for operating the company and can be modified as the business grows and changes. Our EasyLLC™ service includes a fully personalized Operating Agreement (as well as an editable copy in Microsoft Word format) for you to modify as the company changes.

Operating an LLC is less formal than a corporation, usually only requiring an Annual Members' Meeting and Members' agreeing to changes of the Operating Agreement and other major company decisions..

Click here for Frequently Asked Questions about LLC's

PROS: Provides the liability protection of a corporation without the corporate formalities (Board meetings, Shareholder meetings, minutes, etc.) and extra levels of management (Shareholders, Directors, Officers). Taxed the same as a sole proprietorship (1 Member LLC) or partnership (2 or more Members).

CONS: Usually more expensive to form than a DBA, requires more paperwork and formal behavior.

The Lowdown: The Entity of Choice for 1-5 person startups, has recently surpassed corporations in popularity. Easy management and limited compliance requirements have made the LLC the user-friendly solution for small business.

How to Get Started: You can start right now. We can form your LLC in any of the 50 States and D.C.