Understanding LLC, DBA, 501(c)3, and More
Whether your business is just starting out or undergoing a change, it can be beneficial to understand the differences between various business structures. Here’s an outline to help you get started, including introductory definitions and financial considerations.
Keep in mind, this article is intended for educational purposes only. Regulations, requirements, and tax law can vary by state. For guidance or specific questions regarding taxes and business liability, we suggest you consult with a tax professional or attorney.
Business Structures 101
Sole proprietorship – This structure is for any business that’s run by a single owner who doesn’t register as another business type. Business assets and liabilities are not separate from the sole proprietor’s personal assets and liabilities. Sole proprietors may also establish a trade name, or DBA (“Doing Business As”), to represent the organization. This is a great, low-risk way to test out your business plan before formalizing your enterprise or creating a tax identification number (TIN) for the business.
Partnership – Limited partnerships (LPs) and limited liability partnerships (LLPs) are simple structures for two or more people who own a business together. A formal agreement determines which partners have limited liability, which partner has unlimited liability (in the case of LPs), and how much control each partner has over the company. This structure is often useful for small businesses or startups that may not be ready to formalize as an LLC or corporation.
LLC – Limited liability companies (LLCs) provide flexibility and tax benefits for one or more owners who want to maintain control over their company while limiting personal liability. Other than sole proprietorships, this is the most common structure for small businesses.
Corporation – As separate entities from their owners, corporations must follow operational guidelines and recordkeeping requirements. This business structure allows the business to be sold as stock or to other shareholders and reduces personal liability.
There are several types of corporations, including: C Corps, S Corps, benefit corporations, close corporations, and nonprofit corporations. These may differ by size, taxation, mission, and corporate structure.
Cooperative – This business structure is typically owned by users or members and run by a board of directors. It is a democratic enterprise (one vote per member) with open membership, generating profit for the benefit of the members.
Is your business model for profit or not-for-profit?
Most companies aim to generate profits. If you have a business concept that’s based on the sale of goods and services, then it likely falls into the “for profit” category. Alternatively, some businesses focus their model on impacting a cause or a community, rather than generating profit. Take for example charities and artistic enterprises. Organizations that provide a philanthropic, social, educational, recreational, or cultural service are more likely to have a not-for-profit or nonprofit business structure.
Nonprofit organizations can receive a tax-exempt status, commonly under Internal Revenue Code Section 501(c)(3) which requires an application through the IRS and registration with their state to be effective. With this tax-exemption, an organization wouldn’t need to pay federal or state taxes on profits. To qualify for tax-exempt status, they’ll be required to follow guidelines that involve a charitable purpose or service mission, a volunteer board to oversee the company, and limitations on where they can and can’t allocate profits.
Where do co-ops fit in? Some are not-for-profit (like Visions), whereas others may operate for profit. The defining features of cooperatives are the cooperative principes, which may vary from industry to industry, but are rooted in early co-ops of the 1800s. Learn more about the cooperative principles of credit unions, which inform our business model, memberships, and more.
Do you want to establish separate finances and business credit?
Business owners should consider whether they’d benefit from separation of personal finances and business finances. Certain business structures could be taxed under the owner’s Social Security number (SSN) instead of a separate tax identification number (TIN) or Employer Identification Number (EIN) associated with the company. Depending on other factors, this may include sole proprietorships, partnerships, and LLCs.
These types of businesses may benefit the owners through qualified deductions for self-employed taxpayers. However, if the organization’s credit history is associated with an SSN rather than EIN/TIN, then the owner may not have business credit, which can make it challenging to borrow.
If you want to be eligible for commercial loans and lines of credit, you may want to consider another business structure, change your business’ tax status, or look for alternatives that could build your credit history and appeal to lenders. You should also consider your personal liability.
Which will be liable for business risk: yourself or your organization?
Reviewing the simplified definitions above, you’ll notice the business structures can differ greatly in terms of personal and corporate liability. As a business grows, some owners may want to assume less risk and allow the enterprise to proceed with its own liability and/or autonomy. The relationship between profit, liability, control, and risk might lead to a transition from one business structure to another. Then again, some owners may be satisfied with a limited liability partnership throughout the business’ lifetime.
In other words, there is no one-size-fits-all solution. By connecting with an attorney, business consultants, and tax professionals, you can weigh these important considerations and see what works for your organization today and your goals for tomorrow.
Your Financial Partner
We serve all kinds of organizations, big and small, from nonprofits and clubs to sole proprietorships and partnerships to LLCs and corporations, and our business experts can help you at any stage of enterprise. At startup, business specialists on our Financial Wellness team can help you lay the foundation for success. During growth or transitions, we can help you explore products, services, and cash management solutions to pursue whatever comes next in your business plan.
Get in touch today – we’re here to support you and your business. Stop by your local branch, give us a call at 800.212.2120, or email BusinessServices@visionsfcu.org.
Learn about account requirements for business members.
Visions Federal Credit Union cannot open accounts for local governments or businesses/organizations that deposit public and/or municipal funds.
Organizations and/or owners must be eligible for membership. Check your eligibility at visionsfcu.org/join.