The Difference Between a DBA, Sole Proprietor, Corporation and LLC

When you’re starting or running a small business, countless questions arise, particularly surrounding your business’ legal structure:

• Is my business legal?
• What kind of business structure means I’ll pay the least in taxes?
• What happens if my business gets sued?
• What business structure is best for me?

Below is an introduction to some of the most common business structures to help you navigate this important decision.

The Sole Proprietorship

The sole proprietorship is the simplest way to operate a business. If you’re self-employed or conducting any kind of business and haven’t picked a formal business structure, then by default, you’re operating as a sole proprietor.

The biggest advantage of the sole proprietorship is that it’s simple to form and maintain. Since there’s no separation between the sole proprietorship and the owner, any income earned by the business is considered income earned by the owner. A sole proprietor owner just needs to keep track of all the business’ income and expenses and report it on a Schedule C with their personal tax return.

However, the biggest drawback of the sole proprietorship is that the owner is personally liable for any debts of the business. So if your sole proprietorship business runs into financial trouble, creditors can come after your personal property and savings. Likewise, you’ll be personally liable for any lawsuits brought against the business.

The DBA (Doing Business As)

A DBA (also called a fictitious business name, assumed business name, or trade name) isn’t actually a legal structure. Rather it’s a way for sole proprietors to use a business name without having to create a formal legal entity (i.e. corporation or LLC). This is typically the simplest and least expensive way for a small business to legally conduct business under a different name.

For example, if Jane Doe wants to open a sole proprietor floral business called “Petals by Jane,” she needs to file a DBA for “Petals by Jane.”  This is basically so there’s a public record to let everyone know what individual(s) are behind a business.

The Corporation (C Corp)

A corporation is considered a separate entity from its owners. This means that the corporation (and not the owners) is responsible for any of its debts and liabilities. This is often called the “corporate shield” as it protects the owner’s personal assets from the business.

A corporation has a formal structure consisting of shareholders, directors, officers and employees. Every corporation must select at least one person to serve on its board of directors and officers are required to manage the day-to-day activities of the company. Corporations need to vote on important company issues. For this reason, the corporation is often seen as administrative overkill for the average small business, and is a better option for bigger companies who plan to go public, seek VC (venture capital) funding, or invest profits back into the company.

As a separate business entity, a corporation files its own tax returns. As a C Corporation owner, you’ll need to file both a personal tax return and a business tax return. In some cases, this can result in a “double taxation” burden for small businesses where first the business must pay taxes on its profits, and then the owners/shareholders must pay taxes on an individual level when those profits are distributed to them.

S Corporation

An S Corporation is a corporation that’s been designed to address this double taxation issue. An S Corporation does not file its own taxes. Rather, company profits are “passed through” and reported on the personal income tax return of the shareholders. S Corporation owners are taxed on their respective shares of the company’s profits (and these profits are not subject to self-employment tax). If an S Corporation owner works in the business, they must be paid a reasonable wage for their activities and the S Corporation must pay payroll taxes on these wages.

An S Corporation starts out like a C Corporation; then the owners elect ‘S Corporation Status’ by filing Form 2553 with the IRS in a timely manner. However, be aware that not every business can qualify to be an S Corporation. For example, an S Corporation cannot have more than 100 shareholders and shareholders must be U.S. citizens or residents.

The LLC (Limited Liability Company)

An LLC is a hybrid of a sole proprietorship and corporation. This structure is very popular among small businesses, and for good reason. The LLC limits the personal liability of the owners, but doesn’t require much of the heavy formality and paperwork of the corporation. This makes it a great choice for business owners that want liability protection, but don’t want to deal with exhaustive meeting minutes, addendum filings, or other paperwork you’d need to file as a corporation.

The LLC gives you flexibility to choose how you want to be taxed. For example, you can structure your LLC to be taxed as a C Corporation or more commonly as an S Corporation (where the business doesn’t file its own taxes).

Keep in mind that this summary isn’t an exhaustive outline of all the nuances of the various business structures. Rather, it’s an introduction to the major differences to help you start to determine what’s right for your business.

Do your own research, and possibly speak with an accountant about your specific tax situation.

Difference Concept Photo via Shutterstock

Read Small Business for Big Thinkers: Learn How to Work with Big Business

When I first started my consulting business, I remember being really impressed by the big company names on some of my colleagues’ customer lists.  “How did you do that?” I asked. “How did you get a contract with P&G or Harley Davidson?”  As it turned out, it wasn’t as big a deal as I thought it was.

In fact, it’s a lot easier than you think, especially if you have yourself a copy of Cynthia Kay’s book, Small Business for Big Thinkers: Unconventional Strategies to Connect With and Win Big Business.  I’ve had a review copy sitting here on my desk for a little while.  It’s a small paperback (at least my review copy was) and it looked like reading I could tackle in a weekend.

Small Business for Big Thinkers is a Small Business’s Short Cut to Success

Cynthia Kay (@ThinkCK) has small business in her genes.  She comes from a family of Greek entrepreneurs and grew up surrounded by small businesses even before she started her own. She’s a passionate spokesperson for small business and spends a lot of her time coaching other small businesses.

In this book, Cynthia shares the strategies that worked for her in getting Fortune Global 100 companies as clients.

Small Business for Big Thinkers is just over 200 pages of insights from Cynthia’s small business experience working with big businesses.  Early in the book she says:

Big businesses were my first customers, so I never realized until recently that many small businesses don’t know how to work with them.  In fact, many small businesses never even try to connect with and win big business.

This spoke directly to me, and maybe it will speak to you too.  I had never considered taking on a big business as a client.  If that sounds like you, than this first chapter is meaty reading because you’ll see that big business is ready, willing and able to do business with you - if you’d only know how to do it.

If You’re Ready to Jump Into the World of Big business, Here is What You’ll Have to Know

Working with big business isn’t something that you just do, it’s a decision, and it’s not for every small business.  Kay goes into great detail on what you will have to have in place before you take on a much bigger client.

Kay starts this book with an interesting perspective, and one I think few small business owners consider when they are starting their business - think and plan for the business you’re intending on running.

This is an important distinction and Kay spends eleven chapters getting you ready to pitch big clients.  She gets her experience from both her business, her families businesses and interviews she’s done with other small business owners.  Her philosophy is before you pitch the big guys, have the following in place:

• An exit strategy.
• A partnering strategy.
• Hire the right people.
• Create a work space.
• Recognize when to keep customers and when to leave them.
• Know when and how to let an employee go.
• Make the choice to get big or stay small.

Then she goes into the phase of the book about approaching big businesses:

• Understanding the big business buyers’ perspective.
• Writing an RFP (Request for Proposal).
• Positioning yourself.
• How to get face-time and when to show up.
• Finding a champion.
• Operating like a big business.

Is This Book Worth Reading?

Before I read this book, I thought that I didn’t have Fortune 500 clients because - I didn’t have Fortune 500 clients.  I have to admit that I hadn’t spent a lot of time considering whether I wanted large customers or not.

Then I read Small Business for Big Thinkers and after going through the book, especially that last section, I’m very clear that I do not want big companies as clients.  Their way of working just doesn’t work for me.  And the good news for me is that I’m not really going to be spending a lot of time thinking about it any more.

What about you?  How much have you thought about having big brands or Fortune 500 clients on your customer list?  If you’re like me and hadn’t thought about it, you’ll want to read this book because you’ll at least know what’s involved and can make the decision for yourself.

Now, let’s say you do want large companies as customers and clients.  If that sounds like you, then you’ll definitely want to grab a copy of this book.  You’ll really get some good insights about what your business has to look like and how to set yourself up as an ideal small business supplier to a large company.

Small Business for Big Thinkers is definitely a unique book.  I’m especially glad Kay put it out there because it’s clear that big companies want to partner with small businesses, but if you want to play with the big boys, you’re going to have to be ready.

Small Business for Big Thinkers is a great first step to getting there.