October 20, 2014

The Difference Between a DBA, Sole Proprietor, Corporation and LLC

business structures

When you’re starting or running a small business, countless questions arise, particularly surrounding your business’ legal structure:

  • Is my business legal?
  • What kind of business structure means I’ll pay the least in taxes?
  • What happens if my business gets sued?
  • What business structure is best for me?

Below is an introduction to some of the most common business structures to help you navigate this important decision.

Common Business Structures

The Sole Proprietorship

The sole proprietorship is the simplest way to operate a business. If you’re self-employed or conducting any kind of business and haven’t picked a formal business structure, then by default, you’re operating as a sole proprietor.

The biggest advantage of the sole proprietorship is that it’s simple to form and maintain. Since there’s no separation between the sole proprietorship and the owner, any income earned by the business is considered income earned by the owner. A sole proprietor owner just needs to keep track of all the business’ income and expenses and report it on a Schedule C with their personal tax return.

However, the biggest drawback of the sole proprietorship is that the owner is personally liable for any debts of the business. So if your sole proprietorship business runs into financial trouble, creditors can come after your personal property and savings. Likewise, you’ll be personally liable for any lawsuits brought against the business.

The DBA (Doing Business As)

A DBA (also called a fictitious business name, assumed business name, or trade name) isn’t actually a legal structure. Rather it’s a way for sole proprietors to use a business name without having to create a formal legal entity (i.e. corporation or LLC). This is typically the simplest and least expensive way for a small business to legally conduct business under a different name.

For example, if Jane Doe wants to open a sole proprietor floral business called “Petals by Jane,” she needs to file a DBA for “Petals by Jane.”  This is basically so there’s a public record to let everyone know what individual(s) are behind a business.

The Corporation (C Corp)

A corporation is considered a separate entity from its owners. This means that the corporation (and not the owners) is responsible for any of its debts and liabilities. This is often called the “corporate shield” as it protects the owner’s personal assets from the business.

A corporation has a formal structure consisting of shareholders, directors, officers and employees. Every corporation must select at least one person to serve on its board of directors and officers are required to manage the day-to-day activities of the company. Corporations need to vote on important company issues. For this reason, the corporation is often seen as administrative overkill for the average small business, and is a better option for bigger companies who plan to go public, seek VC (venture capital) funding, or invest profits back into the company.

As a separate business entity, a corporation files its own tax returns. As a C Corporation owner, you’ll need to file both a personal tax return and a business tax return. In some cases, this can result in a “double taxation” burden for small businesses where first the business must pay taxes on its profits, and then the owners/shareholders must pay taxes on an individual level when those profits are distributed to them.

S Corporation

An S Corporation is a corporation that’s been designed to address this double taxation issue. An S Corporation does not file its own taxes. Rather, company profits are “passed through” and reported on the personal income tax return of the shareholders. S Corporation owners are taxed on their respective shares of the company’s profits (and these profits are not subject to self-employment tax). If an S Corporation owner works in the business, they must be paid a reasonable wage for their activities and the S Corporation must pay payroll taxes on these wages.

An S Corporation starts out like a C Corporation; then the owners elect ‘S Corporation Status’ by filing Form 2553 with the IRS in a timely manner. However, be aware that not every business can qualify to be an S Corporation. For example, an S Corporation cannot have more than 100 shareholders and shareholders must be U.S. citizens or residents.

The LLC (Limited Liability Company)

An LLC is a hybrid of a sole proprietorship and corporation. This structure is very popular among small businesses, and for good reason. The LLC limits the personal liability of the owners, but doesn’t require much of the heavy formality and paperwork of the corporation. This makes it a great choice for business owners that want liability protection, but don’t want to deal with exhaustive meeting minutes, addendum filings, or other paperwork you’d need to file as a corporation.

The LLC gives you flexibility to choose how you want to be taxed. For example, you can structure your LLC to be taxed as a C Corporation or more commonly as an S Corporation (where the business doesn’t file its own taxes).

Keep in mind that this summary isn’t an exhaustive outline of all the nuances of the various business structures. Rather, it’s an introduction to the major differences to help you start to determine what’s right for your business.

Do your own research, and possibly speak with an accountant about your specific tax situation.

Difference Concept Photo via Shutterstock

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Nellie Akalp


Nellie Akalp Nellie Akalp is CEO of CorpNet, her second incorporation filing service based on her strong passion to assist small business owners and entrepreneurs in starting their business. Free guides, advice and videos on small business legal topics are available at her Small Biz Corner.

43 Reactions

  1. Nellie, great overview of the possibilities. Readers should also note that there is much more to all of this as you aptly point out. For example, DBAs offer no protection against someone taking your name and incorporating it. Also, fringe benefits, insurances and the like are treated differently depending on the entity. No one should form an entity on their own. A tax attorney should be consulted to avoid mistakes and complicated do-overs. Readers may want to look at Choice Of Legal Entity For Your Business at http://www.sjfpc.com/choice_of_legal_entity.html and Choice of Business Entity: Legal, Financial and Other Non-Tax Concerns http://www.sjfpc.com/choice_business_entity_legal_financial_non-tax_concerns.html

  2. Also, some states like PA have a capital stock tax. Choosing the wrong entity can result in some very significant state taxes.

  3. We operated as a Sole Proprietorship. One of the reasons we incorporated was the liability issue. But the main selling point for us was we could have a minority-owned status – which made ME the boss. :)

  4. There is a lot to learn from this article. DBA is quite new to me. I always thought it was just sole proprietorship, partnership and corporation. It’s amazing how many variations people can come up with.

    • Hi Aira –

      Very true! The DBA is the filing required for the sole proprietorship business structure; the DBA is not a business entity but merely the filing paper required to formalize a sole prop within the state or county you conduct business in. it is basically a filing you do with your state or county giving notice to the public as to the business name you are conducting your business under as a business owner.

      Thanks for reading and commenting!
      – Nellie

  5. Great info, Nellie.

    Back to the basics…and for some new small business owners, learning about business entities can be a real wake-up call.

    Setting a business up correctly is crucial.

    The Franchise King®

  6. My business partner started out as sole proprietorship for the sports surfacing business locally and then branched to Limited Liability Company (LLC) when I came in. Informative article.

  7. This is a great summary of the various business structures. I just want to add that while S Corps do not pay taxes on the corporate level (nor do LLC’s on the business level), they do still have to file a tax return separate from their personal return with the IRS and there may be returns required by their respective state. I know here in PA, returns are required for all C Corps, S Corps and LLC’s (even a sole proprietor LLC).

  8. Good overview. In Ohio it is good to form a seperate entity (LLC or Corp) for four reasons; 1. Asset protection, name registration, seperate finances, and market creditability.

  9. Nellie: I hadn’t heard about “Doing Business As”. Have you heard about the company form, business employment company?

    • Hi Martin –

      Doing Business as is just another name for doing business under a fake business name as a single person business owner or sole prop and the filing required to formalize a sole prop is a doing business as filing also know as a DBA with the state or county you conduct business in. I have not heard of that company you are referring to.

      Thanks!
      -Nellie

  10. Thank you for putting this into easy to understand language. I’ve read a lot of books and articles on this subject and felt like I understood it, but your explanation really made me comfortable with the information.

  11. Hi – great information. Thank you!
    Does a Partnership fall into one of these or is it something different entirely?

    • Hi Melissa –

      Glad the post was helpful! :) Thanks for reading!

      In response to your Q: A partnership is two or more people doing business together…very similar to the sole prop, but you are dealing with a partners so whatever you do or they do, you are all joined at the hip and any actions on their part or any part of any partner can bind you personally and legally. As such, if you are going to be in business with a partner, the structure you may want to consider is the Limited Liability Company which not only allows a co to be taxed as a partnership but will also provide you with the liability protection as well. You can read more about the LLC here at: http://www.corpnet.com/benefits-of-the-llc/

      Hope that helps!
      -Nellie

  12. What is the best structure for a small business, so I can use the tax credits on my personal Income tax, or is this a possibility. Thanks for your help

  13. In some places, having a Corporation or LLC is good for several factors like protecting assets, increasing profit, and registering your business. Here in Australia, we have an online ABN registration. People opting to register their businesses here will save a lot of time.

  14. Hi! I am thinking about starting up a business. I would be doing personal shopping for individuals who simply do not have the time (busy lifestyle). How would you recommend me going about it?

    • Hi Reza,

      Thank you for your question! Ultimately, the way you structure your business is your decision, however, what we see most often is that smaller based businesses that only have one or two owners typically prefer the LLC. The LLC offers liability protection, just like a corporation, but it avoids several formalities that corporations face. For example, corporations are required to have regular meetings, stock, shareholders, etc. LLCs tend to be a little simpler, as they do not have these requirement. Hope that helps!

      If you’d like to chat further, feel free to call my company and ask for Katie Hendrix and she would love to walk you through some options: 888.752.0363
      -Nellie

  15. Hi! I recently formed my business at our local gov office. I wanted to know what the difference was between a “sole proprietorship” and “proprietorship”.

    Thanks!

    • Wendy, sole proprietorship relates to a one person operation, non-incorporated. Proprietorship is more generic as it can include both a sole proprietorship and a business generally. You do realize that neither of these offer any legal protection against being sued personally for business debts.

  16. I am so glad I ran into this article. I am new to the entrepreneurship world. I need help determining how to move forward with my business name. It is a little complicated. could you please email me I could really use some help.

    Thanks

    • Hi Kermesha –

      Glad the article was helpful for you. I have tons of information on registering your business name. Can you please send me your email and I will have someone from my team touch base for a free business consultation to chat about your specific needs?

      Alternatively, you can touch base directly with Katie Hendrix anytime and she would love to walk you through next steps: khendrix@corpnet.com; 805.449.2638 x110

      Thank you!
      -Nellie

  17. Quick Question? As a Social Security recipient, I also work via contract as a consultant teaching courses at various colleges. However, since the colleges continue to send me W-2 earnings, SS shows I have now received an overpayment from the amounts I should otherwise earn. If I set up an LLC, will my contractors send me a 1099 instead or what are your suggestions for showing on my 1040 that I am in fact operating a business and am not a part-time worker??

    • Hi Annette,

      Great question. As this is a tax question, I would recommend getting some guidance from a CPA or accountant. They will be able to present you with your options and should point you in the right direction.

      Sorry I couldn’t be of more help!
      -Nellie

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