LLC, Corporation, or DBA?
How to choose the right business entity for your business.
When starting a new business, the key to long term success is in the preparation and planning stage. At this early stage, the business owner’s understanding of the risks involved with the specific business as well as their long term goals will help inform the decision they will make as to which business entity to select and operate under. Each entity type—LLC, corporation, or DBA—possess differing advantages and disadvantages that the small business owner must consider.
How does a Limited Liability Company (“LLC”) compare to a corporation or a DBA?
An LLC is a business entity that is an unincorporated association organized under Oregon law that can have one or more owners or “members.” The primary advantages of an LLC are threefold: the limitation on liability it offers to its members, managers, and employees; the favorable tax treatment it grants to its members, as well as its ease of use and management by its members and managers.
Similar to a corporation, LLC liability protections exist to shield its members, managers, and employees from being held personally liable for the business’s actions, debts, and liabilities. In other words, if the business goes bankrupt, gets sued, or enters into a costly agreement, the LLC’s members, managers, and employees will not be held personally responsible for any of the business’s obligations.
Furthermore, an LLC, like a DBA, is what is referred to as a “pass through entity” for tax purposes, meaning that all profits and losses of the LLC pass through to its members’ personal income tax returns. Unlike a corporation, all LLC business income is only taxed once on the members’ income tax return and not twice at the corporate level and then again at the individual level.
Finally, unlike a corporations, an LLC is relatively cheap and easy to form and can operate with much less formality than their corporate counterparts. LLCs are formed by filing articles of organization with the state and paying a small fee, and are governed by an operating agreement, a contract between the members, which lays out the authority, limitations, and voting rights of its members and managers as well as how profits and losses are shared between them. An LLC has the option of either being “member-managed,” meaning managed directly by its members, or “manager-managed,” meaning managed by a separate non-member individual which both surpass a corporation in ease of management and requirements to adhere to corporate formalities.
How does a Corporation compare to an LLC or DBA?
Unlike an LLC, a corporation is often a more complex business entity incorporated under Oregon law which is owned by “shareholders” through shares of stock in the corporation. Corporations, like LLCs but unlike a DBA, offer similar liability protections for their shareholders, directors, and employees, and they tend to be advantageous when a public offering of equity interests, a tax-free merger or similar reorganization with another corporation is likely, or the business is seeking venture capital investment.
If the long term goal of the company is to eventually “go public” the advantages of a corporation far exceed that of an LLC. Corporations also allow for differing classes of shares in the company with differing economic and voting rights to be sold both by private and public placement to investors. Likewise, venture capital firms have shown reluctance to invest in LLCs and have historically preferred businesses organized as regular corporations.
That said, corporations do not possess the favorable “pass through entity” tax treatment of an LLC. Corporate profits are subject to corporate level income taxation and then shareholders are subject to personal income taxation on their distributions.
Relative to a DBA and an LLC, a corporation can be more costly to form and is more complicated to operate. Like an LLC corporations are incorporated by filing the articles of incorporation with the state and paying a fee but often times the founding documents that dictate corporate governance, the articles of incorporation, bylaws, and shareholder agreements, tend to be more complicated than a simple operating agreement. Likewise, a corporation’s day to day activities are managed by officers who are appointed by a board of directors whom oversee the business, whom themselves are elected by the corporation’s shareholders. This multi-tiered governance and ownership structure requires additional meetings and corporate formalities not required of LLCs or DBAs.
How does a DBA compare to an LLC or a corporation?
Finally, a DBA or “doing business as” is the simplest and cheapest way to conduct business. Unlike a corporation or an LLC, a DBA is not a business entity or legal structure at all but instead it is a means by which to conduct business under a trade name, assumed name, or fictitious name, rather than using your own personal name. A DBA can be obtained by filing a form with the state and paying a small fee. Though it is the simplest and cheapest means by which to operate business and it does offer the same tax advantages of an LLC, a DBA does not offer any of the limited liability protection of an LLC or a corporation. In other words, as a DBA, the individual would be personally liable for all of the debts, agreements, and actions of the business.