The Lowdown on Registering Your Small Business

"...a lawyer and a financial advisor can be the key ingredients for helping a business owner put their best foot forward as they take on the business world.'"

By Emily Hadraba Davis

When it comes to starting a business, even the registration process can be daunting. The choices for business structures include DBAs, LLCs, LPs, LLPs, C, S, and B corps, Nonprofits, Cooperatives, Sole proprietorships, and combinations of all of the above [1]. Looking at this alphabet soup to choose the most appropriate structure (or structures) can seem like an overwhelming task on top of the laundry list of other requirements needed for opening a new business. What do they all mean? Which is the best? And do I even need to register my business?

To answer this last question, yes – it is the law that businesses operating in California must be registered with the state. Registration allows the public to know who is operating a company and makes sure that no one else uses a company’s name for their own profit. [2] As for which is the best, the answer is all of them… for different businesses, because it varies from case to case, or rather, business to business. Before picking the most appropriate one, though, it is important to understand the basics of the choices. Here is a guide to break them down:

DBA stands for “doing business as” and refers to the type of registration a business needs to file when the company uses an alias rather than their legal name. For example, if a company is legally registered as Really Good Coffee LLC, the owners can file for a DBA so they can operate their business as Really Good Coffee. It removes clunky wording and makes a business easier to market. [3] It’s a basic form of registration that costs less than other business structures, and it provides owners a level of control over their brand without dealing with the regulations and formalities needed in other structures. The downside, however, is that DBAs by themselves offer no protection against personal liability. [4]

A sole proprietorship is a business run by one person (or a married couple) [5] who has complete control of the business. In fact, if someone does not register their business as any other type of structure, it is automatically considered a sole proprietorship. This type of business is easy to start up and has low costs. Despite this, though, there are a few downsides: owners cannot sell stocks to raise funds, banks are less willing to lend them money, and should the company accumulate any debts or other financial issues, the owner is personally liable. [6]

If there is more than one owner the simplest business structure for them is a partnership, which has two types: Limited partnership (LP) and Limited liability partnership (LLP). Limited partnerships (LP) are structured so only one owner has unlimited liability, meaning that member is personally liable to pay business debts. The other owners have limited liability, or their personal finances are protected. [7] [8] Limited liability partnerships (LLP), on the other hand, allow all owners to be protected against personal liability. [9]

Limited liability companies (LLC) are a great option for a lot of businesses whose owners, or members, have personal assets they want to protect. For the most part, owners are completely protected against personal liability, with some exceptions, since the business is considered to be a separate legal entity. [10] [11]. There are some significant tax benefits, management’s structure is flexible, and it is fairly easy to run once set up, unlike corporations. Another perk is most states allow LLC members to be made up of pretty much anyone or any entity (including other LLCs), and there is no limit to how many owners there can be. [12] That being said, it should be noted that, unless written into the operating agreement, if a member leaves the company, many states require the company to be dissolved before reforming again. [13]

C, S, benefit (B corps.), and close corporations are all types of corporations with minor differences between them. Corporations are similar to LLCs, but they are more regulated and formal and are taxed differently. C corporations separate the owners’ personal liabilities from the company, allow shareholders to leave more easily, and can sell stocks to raise money, but they are susceptible to double taxes. S corporations are set up to not be taxed twice, but shareholders are limited to a cap of 100 and all need to be U.S. citizens. Benefit corporations exist to provide a public benefit and need to file reports in accordance with some states. They are also taxed similarly to C corporations. Close corporations are less formal corporate structures and can operate without a board of directors. [14]

Nonprofit corporations, like B corporations, provide a public benefit with their products and services, but they are tax-exempt (if they file with the IRS). These are corporations that center around charity, education, religious, literary, or scientific work, and they are subject to many rules regarding what they can and cannot do with their business profits. Cooperatives are businesses that are owned and operated by the people that use the services. [15]

Even with all of these terms understood, weighing the pros and cons of these choices is a challenge. Every business and financial situation is different, so every business is going to have different security needs and vulnerabilities to debate. For instance, if a business owner does not have a lot of personal assets to be protected, it might not make sense to pay the higher costs of registering for an LLC or a corporation. However, if a business’s success is less definite, the owners might be willing to pay more for their protection.

Businesses are risky. About one in five small businesses close down in their first year alone. [16] But, one way to avoid some of the pitfalls that come with operating a small business is to set it up well at the start in accordance to what the business’s needs are. This is where good advice from experts is valuable. Having an attorney and a financial professional go over an individual’s business idea, financial assets, and legal vulnerabilities to help decide on the most appropriate business structure, draw up agreements, and file the necessary paperwork correctly is crucial. When there is so much at stake between the financial concerns, making sure laws are followed, and business operations are as effective as possible to generate profits, a lawyer and a financial advisor can be the key ingredients for helping a business owner put their best foot forward as they take on the business world.

1. https://www.sba.gov/business-guide/launch-your-business/choose-business-structure

2. https://www.upcounsel.com/business-registration

3. https://www.legalzoom.com/articles/what-is-a-dba

4. https://www.rocketlawyer.com/article/dba-vs-llc-whats-right-for-your-business-cb.rl

5. https://www.ftb.ca.gov/file/business/types/sole-proprietorship.html

6. https://www.sba.gov/business-guide/launch-your-business/choose-business-structure

7. https://smallbusiness.chron.com/difference-between-limited-unlimited-liability-61771.html

8. https://www.sba.gov/business-guide/launch-your-business/choose-business-structure

9. Id.

10. https://www.rocketlawyer.com/article/dba-vs-llc-whats-right-for-your-business-cb.rl

11. https://www.sba.gov/business-guide/launch-your-business/choose-business-structure

12. https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc