Whether you plan to start a new business or you have decided to purchase an existing business, one of the first things to decide is which company type (also known as "business structure" or "business entity") is best for you.
When you're starting your business, countless questions will arise related to your business' legal structure:
- What business structure will allow for the most tax benefits?
- What happens if someone sues my business?
- What business structure is best for me?
Each company type has specific advantages and disadvantages. Here are some things to consider if you're deciding whether to file for a DBA or incorporate as an S corporation.
DBA (Doing Business As)
A DBA (also called a fictitious or assumed business name) is a way for sole proprietors to use a business name without having to create a formal legal entity (i.e., corporation or LLC). Forming a DBA is typically the simplest and least expensive way for a small business owner (or owners) to legally conduct business under a different name than their own. For example, if Mike wants to open a sole proprietor consulting business called "Mike's Consulting," he needs to file a DBA. This is basically so that there's a public record to let everyone know who is behind the business.
An S-Corporation (or S-Corp) is a legal corporation, “whose shareholders elect to report corporate income, losses, deductions, and credits through their own individual tax returns.”
Another significant feature of an S Corporation is, it does not file its own taxes. Instead, company profits or losses are "passed through" and reported on the personal income tax return of the shareholders. If an S Corporation owner works in the business, they should be paid a reasonable wage for their contribution to the business, and the S Corporation must pay payroll taxes on these wages.
Here are a few key differences, which will help let you decide.
- 1. Debt Risk: Let's imagine you're running a sole proprietorship business and you accumulate debts. If you are running a DBA, your personal property is at risk because you're personally liable for the business debts. However, in the case of an S-Corporation, your assets are safe, because the corporation provides limited liability protection to you.
In an S-Corp, you personally are not held liable for the debts you accumulate in the business. In general, creditors cannot seize your personal assets (your house, car other property) to pay the business debts.
- 2. Generating Funds for Business: Most banks and financial institutions nowadays ask loan seekers whether they're an incorporated business. Being a DBA, it may get difficult for you to get a loan. If you are an S-Corp, there are relatively higher chances of securing funds for the business.
- 3. Tax Savings: “S-corporation owners have a choice to receive both a salary and dividend payments from the corporation. Tax on dividends is much lower than self-employment income, which lowers taxable income.” Also, S-corp owners save on Medicare and Social Security taxes because their salary is comparatively less than it would be if they were operating a DBA, for instance.
- 4. Extensive Business Duration: S-Corps usually have a longer life as compared to DBAs. Even if the main shareholder(s) decides to sell the business interest or worst case if the shareholder(s) dies, the business continues. You could say it almost has a life of its own.
- 5. Transfer of Ownership: One of the benefits of choosing your business as an S-Corporation is the convenient ownership transfer feature. Except for an S corporation ownership, there is provision for a convenient and trouble-free transfer of ownership for corporate business.
- 6. Higher Credibility and Reputation: Imagine you are trying to build a brand new business venture and you are working on different pieces of business such as clients, hiring staff, partners, suppliers, or even creditors. You can use the reputation and credibility of the already established S-Corp to gain people's trust in your new business.
The decision to file a DBA or form a corporation depends on your particular business, situation, and goals. We have laid out the specifics above, and we hope it helps you to make a decision. If you are looking to save taxes, be debt-free personally, and create a good reputation, consider filing an S-Corp. If you would like to jumpstart your efforts, consider a business loan from LoanMe. You can speak to one of our agents about the benefits and the possibility of receiving the loan quickly.