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Business 101: The Structure of Your Business
Learn about the most common business structures that companies utilize
BY JAMES HOLLOWAY
The legal structure of your business can have a significant impact on the day-to-day operation of your company. The structure you select should be based on the goals and needs of the business. The type of structure can affect how much paperwork you must do at startup and on an ongoing basis. It also affects your tax burden. There are several types of business structures that are commonly used by most companies. Deciding on a business structure is never a one-time event. As your business grows or changes, you may need to restructure your company into one of the other types.
A quick overview of each category should help you decide which business structure is right for your company. You should always check with your accountant or attorney before making any sort of changes to the way your business operates.
Sole Proprietorship
According to the Small Business Administration (SBA), “A sole proprietorship is the simplest structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner.”
In a sole proprietorship, Julie Jones (the customer) purchases products or services from Sam Smith (the sole proprietor) and writes a check payable to Sam Smith for those products or services. One word of caution for anyone who operates a business in this fashion: You should keep a separate bank account for all business transactions.
Being a sole proprietor has advantages (such as total control and ease of setup), but it also comes with some disadvantages (such as the business owner being totally responsible for any financial or legal disputes that arise).
Doing Business As (DBA)
Doing Business As, commonly abbreviated as DBA, refers to a business with a fictitious name. Having a fictitious name does not mean it is a fake business. It just means that the owner of the business is operating their business using a made-up name rather than their personal name. Perhaps Sam Smith decides to create a DBA and calls it “The ShadeSmith.”
With a DBA, Julie Jones would purchase products or services from Sam Smith and write a check payable to “The ShadeSmith” for those products or services.
Most states in the U.S. require the business owner to register the fictitious name that the company will be operating under. This helps the State identify the business, but it also helps prevent confusion for consumers by preventing more than one business owner from operating under the same fictitious name in that state.
According to Legalzoom.com, “DBAs are not restricted to sole proprietors. If you’ve formed an LLC and your LLC wishes to do business under a name other than its legal name, you’ll be required to register a DBA in order to do so.”
Most DBAs are subject to the same lack of distinction between business and business owner as sole proprietorships since a DBA is usually not a formal business entity.
Limited Liability Company (LLC)
An LLC is one of the most common structures for small to mediumsize businesses. Unlike a sole proprietorship or DBA, an LLC can protect the business owner from personal liability if the business faces bankruptcy or lawsuits.
When doing business with an LLC, Julie Jones would purchase products or services from Sam Smith or one of his employees and would make her check payable to “The ShadeSmith LLC.”
An LLC is comprised of an owner or owners. The percentage of ownership of the LLC is determined by the percentage invested at the startup of the business. For example, if Sam Smith and his brother Steve Smith want to go into business together, and Sam invests $60,000 but Steve only invests $40,000, they are not “equal partners.” Sam has a 60 percent membership stake and Steve has a 40 percent membership stake in the startup. As the business grows, an LLC can add or remove members as needed. New articles of incorporation may have to be submitted to the State in some cases. LLCs can have employees, but the members of the LLC are not considered employees.
There are several advantages and disadvantages to this structure. You should always check with your accountant or attorney before doing business as an LLC.
S Corporation
Contrary to popular opinion, an s corp or small business corporation is not actually a business structure. It is more of a taxation category. Depending on how your LLC is set up and whether there are any advantages to doing so, your accountant may recommend that you elect to be taxed as an s corp. Your day-to-day operations would still be those of an LLC.
If you need more information on choosing a business structure, the SBA website, SBA.gov, is a good place to start. z
SouthEastInstalls.com TraVerseBlog.com Learn2Install.com James Holloway began his window treatment career as a full-time installer in 2001. In 2009 he started his own business, South East Installation Solutions, an “installation only” company based in Greenville, SC. His professional writing career began in 2013 with the launch of “TraVerse: A Window Coverings Blog.” He has also been asked to speak at various events including WCAA chapter meetings. His latest endeavor is the creation of a hands-on installer training facility.
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