DBA, LLC, Corporation -Choose Wisely
There are many legal structure options when forming a company. Which is right for you?
When you are forming a company, assuming it is a for profit entity, you will want to discuss the options with both your accountant and your attorney. They will guide you to the best structure for your firm and your particular situation. It is truly imperative you gather these circle of trust advisors and discuss the best way to move forward. You really should not take this step alone.
As individuals, we all have the option to ‘Do Business As’ under a company name. You will receive an EIN for the name of your firm. But this is essentially an extension of you, personally. You take on the risk of the firm. It is the simplest and quickest form of creating a ‘brand’. However, discuss the risk component with your attorney. Simple may not be best.
Next up are the LLC and its sister structure, the PLLC. These are Limited Liability Companies. The P stands for Professional and is solely for the use of Licensed Professionals, such as attorneys, architects, doctors, etc. if you do not have a Professional License, you cannot apply for a PLLC. The standard LLC applies to the rest of us.
Both my small businesses have been LLCs. The dog business was a multiple member LLC as I had a business partner. The consulting firm is a single member, me, LLC. There are tax implications if there are multiple members, mostly on how you report your information. You will likely see this structure for most sole proprietors, if they are not a DBA. Speaking solely for my firm, the added liability protections afforded to this structure made it conducive to my needs and risk tolerance, which is close to zero! Again, discuss this option in detail with your advisors, especially if you are a small business and a single member owner, with no partners.
Larger firms almost always choose a form of a corporation as their legal structure. There are C Corps and S Corps which are most common. The choice between them is almost always tax driven.
C Corps suit growing and larger organizations with multiple owners, particularly if they are not related. This type has what is commonly referred to as the ‘double taxation’ aspect. The company is taxed on its profits and the owners are taxed on their distributions. S Corps see their profits passed directly to the owners, based on ownership share percentage, For one taxation amount.
These are certainly not the only options for your legal structure choice, but, likely the most common. Each has its own purpose and discussing the right one for you is one of the most important conversations you will have with your accountant and attorney.
If you have ever chosen a pet for your family, you likely looked at energy level, prey or pack mentality, and weighed the options best for you or your family. Choosing the legal structure for your business is really no different. Characteristics of one type may be better suited to your individual needs. Consult the experts and you will find the right home for your firm’s appropriate structure.
Be well.
