DBA designation

First and foremost, Doing Business As or DBA is a designation that can be used by any legal entity be it corporate or individual to operate a business under a name that is not their legal name. We too often jump to the conclusion that DBA is only associated with individuals who operate a small business and are not incorporated. In reality many corporations register under a DBA to do business under a “Brand” name. State and local governments usually require companies and individuals to register any alternate names under which they do business. Called a Doing Business As (DBA) filing, this action allows the company or individual to legally operate under a trade name, also known as an "assumed" or "fictitious" name.

By having a DBA name, it's possible for sole proprietors and general partners to do business using a name other than the owners' personal name. In the case of c corporations, s corporations, limited liability companies (LLCs), Sole Proprietorships, nonprofits and some other formation types, a DBA filing allows them to do business under a name different than the one that appears on their original incorporation documents.

A few practical examples of how DBA names are used:

• Sole proprietors and general partners often choose to operate under a DBA name. For example, business owner John Smith might file the DBA name "Smith Roofing."

• Corporations and limited liability companies (LLCs) may register alternate names for specific lines of business. For example, Helen's Food Service Inc. might register the DBA name "Helen's Catering."

By registering a DBA name for your business, you could enjoy:

• better visibility for marketing purposes

• enhanced credibility among suppliers and customers

• an easier time opening business bank accounts

• the ability to transact business under a different name on the Internet

We must obtain DBA registration confirmation in order for a business receiving checks made payable to the DBA name to negotiate the checks they receive. The registration process ensures that no two businesses operate under the same name although it does not prevent very similar names from being used which can cause headaches and very real risks to financial institutions.

Business Ownership Type – Sole Proprietorship

A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and the individual as owner. The soul owner is entitled to all profits and are responsible for all business’s debts, losses and liabilities.

Forming a Sole Proprietorship

No formal action is required to form a sole proprietorship. As long as there is only one owner, the status automatically comes from your business activities. But like all businesses, a sole proprietor needs to obtain the necessary licenses and permits. In most cases the business with need a DBA designation unless the owners FULL NAME appears in the business name and on all checks received by the business. In other words if the owners name is John Smith and they have a decking business, the would have to be called “John Smiths Decking” which would need to appear on all checks. “Smith’s decking” would not be allowed and would need to be registered as a DBA

If you choose to operate under a name different than your own, you will most likely have to file a fictitious name (also known as an assumed name, trade name, or DBA name, short for "doing business as"). You must choose an original name; it cannot already be claimed by another business.

Sole Proprietor Taxes

Because the owner and the business are one and the same, the business itself is not taxed separately-the sole proprietorship income is the owners income who would report income and/or losses and expenses with a Schedule C and the standard Form 1040 . The “bottom-line amount” from Schedule C transfers to their personal tax return. It’s the owners responsibility to withhold and pay all income taxes, including self-employment and estimated taxes . You can find more information about sole proprietorship taxes and other forms at IRS.gov.

Advantages of a Sole Proprietorship

• Easy and inexpensive to form: A sole proprietorship is the simplest and least expensive business structure to establish. Costs are minimal, with legal costs limited to obtaining the necessary license or permits.
• Complete control. Because you are the sole owner of the business, you have complete control over all decisions. You aren’t required to consult with anyone else when you need to make decisions or want to make changes.
• Easy tax preparation. Your business is not taxed separately, so it’s easy to fulfill the tax reporting requirements for a sole proprietorship. The tax rates are also the lowest of the business structures.

Disadvantages of a Proprietorship 

• Unlimited personal liability. Because there is no legal separation between you and your business, you can be held personally liable for the debts and obligations of the business. This risk extends to any liabilities incurred as a result of employee actions.
• Hard to raise money. Sole proprietors often face challenges when trying to raise money. Because you can’t sell stock in the business, investors won't often invest. Banks are also hesitant to lend to a sole proprietorship because of a perceived lack of credibility when it comes to repayment if the business fails.

Business Ownership Type – Partnership

A partnership is a single business where two or more people share ownership.

Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business typically in relation to the proportion of each partners ownership interest.

Because partnerships entail more than one person in the decision-making process, it’s important to discuss a wide variety of issues up front and develop a legal partnership agreement. This agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership (bring in new partners or buy out current partners) and how to dissolve the partnership. Although partnership agreements are not legally required, they are strongly recommended and it is considered extremely risky to operate without one. Any account opened under a partnership that does not have a partnership agreement must be reviewed by senior management and will most likely be declined.

Types of Partnerships 

There are three general types of partnership arrangements:

• General Partnerships assume that profits, liability and management duties are divided equally among partners. If you opt for an unequal distribution, the percentages assigned to each partner must be documented in the partnership agreement.
• Limited Partnerships (also known as a partnership with limited liability) are more complex than general partnerships. Limited partnerships allow partners to have limited liability as well as limited input with management decisions. These limits depend on the extent of each partner’s investment percentage. Limited partnerships are attractive to investors of short-term projects.
• Joint Ventures act as general partnership, but for only a limited period of time or for a single project. Partners in a joint venture can be recognized as an ongoing partnership if they continue the venture, but they must file as such.

Advantages of a Partnership

• Easy and Inexpensive. Partnerships are generally an inexpensive and easily formed business structure. The majority of time spent starting a partnership often focuses on developing the partnership agreement.
• Shared Financial Commitment. In a partnership, each partner is equally invested in the success of the business. Partnerships have the advantage of pooling resources to obtain capital. This could be beneficial in terms of securing credit, or by simply doubling your seed money.
• Complementary Skills. A good partnership should reap the benefits of being able to utilize the strengths, resources and expertise of each partner.
• Partnership Incentives for Employees. Partnerships have an employment advantage over other entities if they offer employees the opportunity to become a partner. Partnership incentives often attract highly motivated and qualified employees.

Disadvantages of a Partnership 

• Joint and Individual Liability. Similar to sole proprietorships, partnerships retain full, shared liability among the owners. Partners are not only liable for their own actions, but also for the business debts and decisions made by other partners. In addition, the personal assets of all partners can be used to satisfy the partnership’s debt.
• Disagreements Among Partners. With multiple partners, there are bound to be disagreements Partners should consult each other on all decisions, make compromises, and resolve disputes as amicably as possible.
• Shared Profits. Because partnerships are jointly owned, each partner must share the successes and profits of their business with the other partners. An unequal contribution of time, effort, or resources can cause discord among partners.

Business Ownership Type – Limited Liability Company or Limited Liability Corporation

A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.

The "owners" of an LLC are referred to as "members." Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs.

Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are "passed through" the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.

Advantages of an LLC

• Limited Liability. Members are protected from personal liability for business decisions or actions of the LLC. This means that if the LLC incurs debt or is sued, members' personal assets are usually exempt. This is similar to the liability protections afforded to shareholders of a corporation. Keep in mind that limited liability means "limited" liability - members are not necessarily shielded from wrongful acts, including those of their employees.
• Less Recordkeeping. An LLC's operational ease is one of its greatest advantages. Compared to an S-Corporation, there is less registration paperwork and there are smaller start-up costs.
• Sharing of Profits. There are fewer restrictions on profit sharing within an LLC, as members distribute profits as they see fit. Members might contribute different proportions of capital and sweat equity. Consequently, it's up to the members themselves to decide who has earned what percentage of the profits or losses.

Disadvantages of an LLC

• Limited Life. In many states, when a member leaves an LLC, the business is dissolved and the members must fulfill all remaining legal and business obligations to close the business. The remaining members can decide if they want to start a new LLC or part ways. However, you can include provisions in your operating agreement to prolong the life of the LLC if a member decides to leave the business.
• Self-Employment Taxes. Members of an LLC are considered self-employed and must pay the self-employment tax contributions towards Medicare and Social Security. The entire net income of the LLC is subject to this tax.

Business Ownership Type – Limited Liability Partnership

The limited liability partnership is a business ownership that is similar to a limited liability company (LLC) in that all partners have limited liability for business debts, but in many states this liability protection is less than what LLCs receive.  Typically the use of LLPs is limited to professional occupations that require a license to do business.  A limited liability partnership agreement is especially appealing to businesses that were prohibited in the past from forming a limited liability company (LLC) or corporation, such as accountants and attorneys. 

Typically only business owners in professions that require a state license in order to practice, such as accountants, architects, attorneys, chiropractors, doctors, dentists, etc., are allowed to form LLPs. An LLP is similar to an LLC: all partners have limited liability for business debts, in many states the protection of limited liability partnerships are less than what LLCs or corporations receive.

Advantages of limited liability partnerships

• Limited liability protection. Partners are not held personally responsible for business debts and liabilities (the limited liability partnership does not protect against liability for partners’ actions, however).
• Pass-through taxation. No tax is paid at the business level. Profits or loss are reported on the partners’ tax returns, and any tax due on business income is paid at the individual level.
• Conversion from general partnership. LLPs typically offer easier conversion from a general partnership to an LLP than to a LLC or corporation.
• Flexible management. Partners have more flexibility in management structure and can determine which partners are responsible for the day-to-day operations.
• Few formal requirements. A limited liability partnership has fewer formal requirements and annual paperwork than corporations.

Disadvantages of an LLC

• Limited Life. In many states, when a member leaves an LLP, the business is dissolved and the members must fulfill all remaining legal and business obligations to close the business. The remaining members can decide if they want to start a new LLP or part ways. However, you can include provisions in your operating agreement to prolong the life of the LLP if a member decides to leave the business.
• Self-Employment Taxes. Members of an LLP like an LLC are considered self-employed and must pay the self-employment tax contributions towards Medicare and Social Security. The entire net income of the LLC is subject to this tax.

Business Ownership Type – Corporation (C Corporation)

A corporation (sometimes referred to as a C corporation) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs.

Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees.

For businesses in that position, corporations offer the ability to sell ownership shares in the business through stock offerings. “Going public” through an initial public offering (IPO) is a major selling point in attracting investment capital and high quality employees.

Advantages of a Corporation

• Limited Liability. When it comes to taking responsibility for business debts and actions of a corporation, shareholders’ personal assets are protected. Shareholders can generally only be held accountable for their investment in stock of the company.
• Ability to Generate Capital. Corporations have an advantage when it comes to raising capital for their business - the ability to raise funds through the sale of stock.
• Corporate Tax Treatment. Corporations file taxes separately from their owners. Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends, while any additional profits are awarded a corporate tax rate, which is usually lower than a personal income tax rate.
• Attractive to Potential Employees. Corporations are generally able to attract and hire high-quality and motivated employees because they offer competitive benefits and the potential for partial ownership through stock options.

Disadvantages of a Corporation

• Time and Money. Corporations are costly and time-consuming ventures to start and operate. Incorporating requires start-up, operating and tax costs that most other structures do not require.
• Double Taxing. In some cases, corporations are taxed twice - first, when the company makes a profit, and again when dividends are paid to shareholders.
• Additional Paperwork. Because corporations are highly regulated by federal, state, and in some cases local agencies, there are increased paperwork and recordkeeping burdens associated with this entity.

Business Ownership Type – Subchapter S Corporation

An "S-Corporation" is a regular corporation that has between 1 and 100 shareholders and that passes-through net income or losses to shareholders under in accordance with Internal Revenue Code, Chapter 1, Subchapter S. Corporations must meet specific eligibility criteria, and they must notify the IRS of their choice to be taxed as an S-Corporation within a certain period of time.

Taxation of Regular Corporations

A regular corporation, sometimes called a "C" Corporation (after Subchapter C of the Internal Revenue Code), is taxed as a separate business entity. Corporations have their own tax form (1120) and their own tax rates (C Corp tax rates). Corporations may choose to retain their profits and earnings as part of their operating capital, or they may choose to distribute some or all of their profits and earnings as dividends paid to shareholders.

Advantages of an S Corporation

• Tax Savings. One of the best features of the S Corp is the tax savings for you and your business. While members of an LLC are subject to employment tax on the entire net income of the business, only the wages of the S Corp shareholder who is an employee are subject to employment tax. The remaining income is paid to the owner as a "distribution," which is taxed at a lower rate, if at all.
• Business Expense Tax Credits. Some expenses that shareholder/employees incur can be written off as business expenses. Nevertheless, if such an employee owns 2% or more shares, then benefits like health and life insurance are deemed taxable income.
• Independent Life. An S corp designation also allows a business to have an independent life, separate from its shareholders. If a shareholder leaves the company, or sells his or her shares, the S corp can continue doing business relatively undisturbed. Maintaining the business as a distinct corporate entity defines clear lines between the shareholders and the business that improve the protection of the shareholders.

Disadvantages of an S Corporation

• Stricter Operational Processes. As a separate structure, S corps require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers and records maintenance.
• Shareholder Compensation Requirements. A shareholder must receive reasonable compensation. The IRS takes notice of shareholder red flags like low salary/high distribution combinations, and may reclassify your distributions as wages. You could pay a higher employment tax because of an audit with these results.