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California entrepreneurs should carefully consider the structure of their new business. There are many ways to organize a business, and their suitability depends on factors like the nature of the business, the number of owners and investors, and even the personalities of the principals. We will examine four business structures and discuss their advantages and the differences: DBA’s (for “doing business as”), C corporations, S corporations, and limited liability companies (LLC). Three major factors come into play in evaluating these business structures: the taxation of income, the liability of the owners for business debts, and the desired level of formality versus flexibility in running the business.
DBA (“Doing Business As”)
A DBA, also known as an assumed business name or a sole proprietorship, is the simplest business organization, because there is no organization. It is simply a business name used by an individual to transact business. The owner pays taxes on business income with a Schedule C attached to a federal income tax return. A major pitfall of a DBA is that it provides no liability protection for the owner whatsoever, since the business is not a separate legal entity. In terms of flexibility, any recordkeeping requirements would depend on the nature of the business. Any requirements imposed on DBA’s in general are minimal.
C Corporation
A C corporation, named for the subchapter in the Internal Revenue Code governing corporate taxation, is a very common business structure, providing a high level of liability protection for its owners. Owners in a corporation are called shareholders, and they are usually not liable for the business’ debts. Income in a C corp is subject to “double taxation,” meaning that the business entity pays income tax on its revenue, and then shareholders pay income tax on dividends distributed to them by the company. The C corp requires a high degree of formality, with regular shareholder and director meetings, minutes, and annual financial reports required by law.
S Corporation
The S corporation, named for a different subchapter, has the same overall structure, liability protections, and formalities as the C corp. The difference is in taxation. The S corp is not taxed at the entity level; income and losses “pass through” to the shareholders, who pay taxes individually. The IRS places limits on the size and ownership of S corps. An S corp cannot have more than one hundred shareholders, and only U.S. citizens, permanent residents, and certain types of business entities may own shares.
Limited Liability Company
The LLC offers pass-through taxation for its owners, known as members, and the same liability protections as a corporation. It has fewer formalities in terms of meeting and reporting requirements, and more flexibility than the corporate business structure. Members may choose to be taxed like a C corp, but the default is pass-through taxation.
The California business lawyers at the Law Offices of Salar Atrizadeh represent individuals businesses and seeking legal guidance and advice navigating the regulatory and transactional pitfalls of state and federal regulations. Our team combines legal knowledge with technological skill to find innovative solutions for our clients. Contact us today online or at (310) 694-3034(310) 694-3034 to schedule a confidential consultation.