For this article, let’s create a fictional business owner and a fictional business. The owner will be Jane Smith, and she’ll be starting up a lemonade stand.
Jane is an entrepreneur. She’s passionate about lemon-based beverages and is excited to get started in this line of business. But before she can sell her first cup, there are a few things she needs to establish.
The first big question is about the type of business entity she wants to create. There are five main types of business entities: sole proprietorships, general partnerships, S corporations, C corporations, and LLCs.
If Jane wants to operate her lemonade stand by herself, she can structure the company as a sole proprietorship. The company’s profits are Jane’s profits, and the company’s liabilities are Jane’s liabilities.
If Jane has a friend who’s also interested in citrus-related hydration, she can structure the business as a general partnership, which is effectively a sole proprietorship with two owners. If it’s a 50/50 split in ownership, the profits are also split 50/50.
Corporations (both S and C) are separate legal entities created to distribute shares in the company and protect owners from liability.
Companies can use LLCs to protect owners from liability, much like a corporation, while also retaining many of the benefits of a sole proprietorship. LLCs, or limited liability companies, have rules that vary from state to state. But forming an LLC means taking advantage of the pass-through tax benefits of a sole proprietorship while also having personal assets protected a la corporations. Finally, LLCs do not feature limits to ownership. An LLC’s ownership group can be made up of individuals, international partnerships, and even other LLCs.
With sole proprietorships and partnerships, the business owner isn’t actually creating a separate legal entity. There are no articles of incorporation, and customers are conducting business directly with the owner or owners. And unless Jane Smith wants her lemonade stand to be known to the world as Jane Smith, she will need a DBA.
Filing a DBA creates a separate name from your own. Maybe the lemonade stand is called Main Street Lemonade, or Jane’s Custom Lemonades. Those names would require filing a DBA.
Having a DBA doesn’t mean you’ve created a separate legal entity. In the above case, Jane Smith is fully on the hook for any debts, liens, or liabilities against her lemonade stand even if the stand goes by Main Street Lemonade.