Which Business Entity is Right for You?

If you are starting a new business, congratulations! This is a huge and exciting part of your professional life, and we are here to help navigate some of those testy new-business waters.

One of the first steps in starting your business is choosing which business entity is right for you so that you can begin and maintain the proper tax and bookkeeping records. You will want to carefully study and weigh the benefits and drawbacks of each business type to determine which is best for you, but here is a short description of each.

You have 4 choices: DBA Regular or C-Corporation S-Corporation Limited Liability Company

A DBA, also known as a “sole proprietorship”, “Doing Business As” or a “Fictitious Name” is basically described as a business that is not separate from its owner; the business simply operates under another name for the owner. This means that the owner is personally liable for the company and its debt, and all income becomes an extension of the owner’s personal tax returns. If there is more than one owner, then the business is called a “General Partnership”. This business entity is easy to set up and maintain, but if you plan to operate beyond your city or county, keep in mind that a DBA is not recognized at state level.

A Regular Corporation or C-Corporation is a separate legal entity from its owner, protecting him from personal liability and company debt. As a separate entity, it can buy real estate, enter into contracts, pursue legal action, money can be raised via stocks, ownership may be transferred, the business may continue regardless of ownership, and tax advantages are definitely worth investigating.  Operating a corporation requires holding a yearly Directors and Shareholders meeting, keeping written minutes, and maintaining corporate compliance as set forth in the Corporate Bylaws. This business entity is more expensive than a DBA, but is one of the oldest and most successful types of business entities because it conveys permanence and has many tax, healthcare and travel  benefits.

Once a corporation has been formed, it may choose to attain “S-Corporation Status” by adopting specific regulations and submitting a form to the IRS. This allows a corporation to be taxed as a partnership or sole proprietorship, meaning the income is passed through to the share-holders for the purpose of computing tax returns. Most new small corporations choose this status so that profits and losses can be added to shareholders’ personal tax returns without having to pay taxes on profits twice (once when profits are made and once when they are returned to shareholders as income or dividends). This is the main reason S-Corporations were created, and is very beneficial for tax reasons. However, S-Corporations cannot deduct many of their expenses, such as health insurance, travel, entertainment, etc. They are also restricted to 100 shareholders or fewer, all shareholders must be US citizens, and these businesses cannot be owned by other business entities. They require a lot of paperwork and formalities, and they are expensive to set up, so it is important to weigh the costs before beginning this type of business..

An LLC or Limited Liability Company is popular because it provides the protection of a corporation, but allows operation without the formalities; thus it are more of a hybrid of a corporation and a partnership (or DBA). An LLC provides easy management, allows “pass-through” taxation as with a DBA, combined with the liability protection of a Corporation. There is no stock or share-holders, so there are no stock regulations to adhere to, and there are few formalities aside form requiring an “Operating Agreement” or rules for operating the company. The ease of management and limited compliance requirements make LLC’s user-friendly and have become the top entity of choice for 1-5 person start up businesses.

Once you have made your entity choice and you area ready to set up your books, please contact us to see how we can further assist you.

Post originally written by Bodhi Leaf Media for www.journeybookkeeping.com

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