Business Forms
I've found that business and IP issues intersect with great regularity, so some information about business law in an IP law blog is only slightly off-topic.
AN OVERVIEW:
DBA is the abbreviation for "Doing Business As." It is a county-based designation in NY. Its taxes are relatively simple. DBAs are the least formal business form -- just run the business in a legal way. However, this business form is just the owner doing business, and accepting for his own personal self all the risks of doing business.
An LLC is an unincorporated entity that is registered with the Department of State. It is a very, very new business form in the law (NY LLC law went into effect in 1994; the earliest LLC law was, I believe, Wyoming, which came into existence in the late 1980s), and the LLC does not cross state lines well; the form is simply too new, and the states do not have uniform LLC laws. If a business owner is planning on doing business across state lines, the LLC, while fashionable, may not be the best selection.
An LLC is taxed like a sole proprietorship if it is a single-member LLC (a "member" is similar to a corporation's "shareholder") and like a partnership if it has 2 or more members. Most states collect an annual franchise tax from the LLC, but the IRS essentially ignores the existence of the LLC as long as there is only one member.
An LLC drops what's called the "corporate veil": the business form separates the owner's personal assets from liabilities that the business incurs as long as the owner complies with proper business practice and as long as owner does not make any personal guarantys to creditors (creditors generally require personal guarantys from new businesses of any form). LLCs require some corporate-type formalities to run.
Partnerships (other than marriage) are not worth considering for an individual, so I omit a discussion of partnership law here; the laws in NY and other states that govern general partnership are absolutely draconian. Very few individuals end up in a general partnership for this reason. Businesses form general partnerships with good legal counsel and a lot of due diligence.
Corporations come in two flavors: the C-corp is what most people think of when they think of a corporation. It is the form that is publicly traded, and it is the more flexible of the two: any legal entity can hold shares and any number of shareholders can hold shares. The price of its flexibility is that it is taxed as a completely separate entity from its owner(s) -- the "double taxation" that you hear about (but the tax rates are dramatically different between the corporation and the individual, so "double" is not necessarily true). S-corporations are taxed as partnerships (that is, the profits and losses of the business are passed through to the individual shareholders and reported on their tax returns in proportion to the number of shares held), but they can have only up to a particular number of natural persons as shareholders (in NY that particular number is 75). Also, an S-corp has to have a darn good reason to have a fiscal year that does not end on 12/31, whereas a C-corp can pick its own fiscal year. S-corp designation requires that a corporation elect the designation on both the federal and state level. All corps are C-corps until they elect S-corp designation. States generally require a franchise tax of all corporations; the feds do not ignore even single-member corporations. Corporations are formal entities and the formalities needed to run them can be complex.
There is rarely a good reason to go out of state to form a small business. By going out of state to form a business, the owner sets up for unnecessarily complex tax issues, for an out-of-state LLC not operating as would one formed in the owner's home state (especially in court), and for liability for lawsuit in the LLC's state of formation.
Business owners -- even sole proprietors -- need an employer ID number (EIN) from the IRS.
AN OVERVIEW:
DBA is the abbreviation for "Doing Business As." It is a county-based designation in NY. Its taxes are relatively simple. DBAs are the least formal business form -- just run the business in a legal way. However, this business form is just the owner doing business, and accepting for his own personal self all the risks of doing business.
An LLC is an unincorporated entity that is registered with the Department of State. It is a very, very new business form in the law (NY LLC law went into effect in 1994; the earliest LLC law was, I believe, Wyoming, which came into existence in the late 1980s), and the LLC does not cross state lines well; the form is simply too new, and the states do not have uniform LLC laws. If a business owner is planning on doing business across state lines, the LLC, while fashionable, may not be the best selection.
An LLC is taxed like a sole proprietorship if it is a single-member LLC (a "member" is similar to a corporation's "shareholder") and like a partnership if it has 2 or more members. Most states collect an annual franchise tax from the LLC, but the IRS essentially ignores the existence of the LLC as long as there is only one member.
An LLC drops what's called the "corporate veil": the business form separates the owner's personal assets from liabilities that the business incurs as long as the owner complies with proper business practice and as long as owner does not make any personal guarantys to creditors (creditors generally require personal guarantys from new businesses of any form). LLCs require some corporate-type formalities to run.
Partnerships (other than marriage) are not worth considering for an individual, so I omit a discussion of partnership law here; the laws in NY and other states that govern general partnership are absolutely draconian. Very few individuals end up in a general partnership for this reason. Businesses form general partnerships with good legal counsel and a lot of due diligence.
Corporations come in two flavors: the C-corp is what most people think of when they think of a corporation. It is the form that is publicly traded, and it is the more flexible of the two: any legal entity can hold shares and any number of shareholders can hold shares. The price of its flexibility is that it is taxed as a completely separate entity from its owner(s) -- the "double taxation" that you hear about (but the tax rates are dramatically different between the corporation and the individual, so "double" is not necessarily true). S-corporations are taxed as partnerships (that is, the profits and losses of the business are passed through to the individual shareholders and reported on their tax returns in proportion to the number of shares held), but they can have only up to a particular number of natural persons as shareholders (in NY that particular number is 75). Also, an S-corp has to have a darn good reason to have a fiscal year that does not end on 12/31, whereas a C-corp can pick its own fiscal year. S-corp designation requires that a corporation elect the designation on both the federal and state level. All corps are C-corps until they elect S-corp designation. States generally require a franchise tax of all corporations; the feds do not ignore even single-member corporations. Corporations are formal entities and the formalities needed to run them can be complex.
There is rarely a good reason to go out of state to form a small business. By going out of state to form a business, the owner sets up for unnecessarily complex tax issues, for an out-of-state LLC not operating as would one formed in the owner's home state (especially in court), and for liability for lawsuit in the LLC's state of formation.
Business owners -- even sole proprietors -- need an employer ID number (EIN) from the IRS.
posted by Nancy Delain at
9:46 PM
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