Choosing a Business Structure: LLC, Corporation and DBA

On many formation sites, choosing a business structure looks like picking one option from a list: "an LLC, an S corp or a DBA". Those options aren't the same kind of thing. So you're really making two decisions. The first is the legal form, which state law sets. The second is how the profit is taxed, which federal tax law sets.

A business structure is the legal form of a business plus the way it's taxed. It decides who is liable for business debts, which tax return the business files and how it can raise money. An S corporation is a tax election open to a corporation or an LLC. A DBA is a registered trade name, and it leaves the structure unchanged.

The common legal forms are:

• the sole proprietorship
• the partnership
• the corporation
• the limited liability company (LLC)

So we'll walk through the choice the way it usually unfolds for a new owner.

Two levels of business structure: legal form and tax treatment

The first thing to sort out is that you're making two decisions, and the formation sites blur them. It helps to look at each one on its own.

The legal form decides whether the business exists separately from you. A sole proprietorship has no separate existence. In law, the owner and the business are the same person. An LLC or a corporation is formed with the state and is its own legal entity.

The tax treatment decides how the IRS taxes the profit. The same legal form can be taxed in different ways. That's why an LLC can be taxed as any of these:

1. a sole proprietorship
2. a partnership
3. a corporation

The IRS puts the link plainly on its business structures page. It says: "Your business structure determines which income tax return form you file." Its list of the most common structures has four entries. They are the sole proprietorship, the partnership, the corporation and the S corporation. It also names the LLC as a structure allowed by state statute.

A DBA ("doing business as") is neither of these. It's a name registered with a state or a county. It changes nothing about liability or taxes.

Business structures compared in one table

With those two levels in mind, the options finally line up. This is the table most owners end up checking again and again while they decide.

The LLC rows show the default tax treatment. The S corporation is a tax election, and the DBA is only a registered name.

You may also see a few other forms on the SBA's list:

• the benefit corporation
• the close corporation
• the nonprofit (501(c)(3))
• the cooperative

These fit special situations. Most new owners end up weighing the sole proprietorship, the LLC, the corporation and the DBA.

The first invoice: you're already a sole proprietor

Many new owners get a first client before they register anything. If you send that client an invoice today, you already have a structure. The IRS defines a sole proprietor as someone who owns an unincorporated business alone. According to the SBA, you become one automatically when you start doing business without registering another type of entity.

So there's nothing to file with the state. That convenience has a cost, though. A sole proprietorship isn't a separate legal entity, so you're personally liable for the business's debts. You can trade under a business name. But you can't sell stock or bring in investors as shareholders.

At tax time, you as the owner:

• report business profit on Form 1040 with Schedule C
• pay self-employment tax on Schedule SE
• usually make estimated payments with Form 1040-ES

The tax line that surprises first-time owners

Self-employment tax is how people who work for themselves pay Social Security and Medicare. According to the IRS, the rate is 15.3%. That's 12.4% for Social Security and 2.9% for Medicare.

A few more IRS rules decide how much you actually pay:

1. The tax applies to 92.35% of net self-employment earnings.
2. It's usually due once those earnings reach $400.
3. Half of it is deductible.
4. In 2026 the 12.4% Social Security part applies to earnings up to $184,500.

LLC members taxed as sole proprietors or partners pay self-employment tax as well. So forming an LLC later won't make it go away. The two structures are compared in more detail in LLC vs Sole Proprietorship.

The moment you want the business apart from you: the LLC

Sooner or later a bigger contract or a risky job makes you want a wall between the business and your own savings. At that point you form an entity with the state. For most small businesses, that entity is an LLC.

An LLC (limited liability company) is a structure created by state statute. You form it with the state, usually through the Secretary of State. The SBA says an LLC protects the owners' personal assets from business debts "in most instances".

In our work with clients, most non-US residents choose an LLC because it's simpler to set up and run. They usually move to a corporation later as their revenue grows.

The SBA points out two LLC rules that owners don't always expect. First, some states limit how long an LLC can exist. Second, when a member joins or leaves, the LLC may have to be dissolved and formed again. That's true unless an agreement covers transfers of ownership, which is one reason the operating agreement matters.

The first tax season as an LLC

When your first tax season comes, you'll find the IRS has no separate tax return for LLCs. An LLC is taxed in one of four ways, depending on its number of members and any election it makes:

• As a disregarded entity. This is the default for an LLC with one member, and the income goes on the owner's return. For employment taxes the LLC is still treated as a separate entity.
• As a partnership. This is the default for an LLC with two or more members. The LLC files Form 1065 and pays no income tax itself.
• As a C corporation. The LLC files Form 8832 to elect corporate treatment. The election can't take effect more than 75 days before the filing date or more than 12 months after it. A single-member LLC that makes it is no longer treated as a sole proprietorship.
• As an S corporation. The LLC files Form 2553 and doesn't need to file Form 8832 separately.

When someone asks "LLC or S corp?"

Somewhere along the way, a friend or an accountant will ask whether you're an LLC or an S corp. The LLC is a legal form, and the S corporation is a tax treatment. So the two can describe the same company.

An "LLC taxed as an S corp" is a common setup. The state sees an LLC, and the IRS taxes it under the S corporation rules. So choosing between them is a tax question about an existing LLC or corporation. The details are in LLC vs S Corp.

When investors or bigger profits come up: the corporation

The corporation is the other entity you can form with the state. You'll usually start looking at it when investors show interest or profits grow. Its tax rules are where it differs most from an LLC.

A C corporation is a separate taxpayer. It pays federal tax at 21% of its taxable income and files Form 1120. When it pays dividends, the shareholders pay tax on them again. That's the "double tax" people talk about. The corporation gets no deduction for the dividends it pays, and shareholders can't deduct the corporation's losses.

In return, the SBA says a corporation:

• offers the strongest protection from personal liability
• can sell stock
• keeps existing when owners leave

It also costs more to form and needs more record-keeping.

An S corporation follows the same filing and operating rules as a C corporation. The difference is the tax. Profit passes through to the shareholders. They pay tax on their share whether or not the money was paid out to them.

Some companies can't be S corporations at all, including certain banks and insurance companies. Corporations that must file 10 or more returns of any type in a calendar year have to e-file. That applies to Form 1120 and Form 1120-S.

The deadline for the S election

If you decide on S corporation tax treatment, the clock matters. You can file Form 2553 at any time during the tax year before the election takes effect. Or you can file it no more than 2 months and 15 days after that tax year starts.

A form missing a shareholder's signature doesn't count as filed on time. If you miss the window, you can ask for late election relief within 3 years and 75 days of the intended effective date.

The S election is a federal filing. It's separate from state registration, and according to the SBA, states handle it in different ways:

1. Most follow the federal treatment.
2. Some tax S corporations above a set limit.
3. Others don't recognize the election and tax the business as a C corporation.

The full comparison of the two legal forms is in LLC vs Corporation.

When you sell under a brand: the DBA

Say your LLC has a dry legal name, but you want customers to see a brand. This is where the DBA comes in. It often ends up on the same list as the LLC and the S corp, but it's only a name. It also goes by other names:

• a fictitious name
• a trade name
• an assumed name

A DBA gives you the right to do business under a name that differs from your legal name. A sole proprietor can trade under a brand name instead of a personal name. An LLC can sell under a brand that differs from the name in its formation documents.

A DBA doesn't create a company. It doesn't separate personal assets from the business either. A sole proprietor who registers a DBA is still a sole proprietor with the same personal liability.

The rules differ by state and sometimes by county. Florida registers fictitious names with the state through Sunbiz for a filing fee. Texas uses an Assumed Name Certificate (Form 503).

The Texas certificate:

• costs $25
• is effective for up to 10 years
• can be renewed in the 6 months before it expires

Trade names are covered in more detail in What Does DBA Mean? DBA and Trade Names Explained.

Choosing a business structure: five questions to answer

By now you know the options, and you still have to pick one. For most owners it comes down to five questions. The answers often point in different directions, so the choice is a balance between them.

• How much risk does the business carry? Clients, vehicles, equipment or contracts can create debts or claims. If yours can, the liability protection of an LLC or a corporation matters more.
• How do you want profit to be taxed? Pass-through taxation avoids the corporate tax. That covers the sole proprietorship, the partnership, the default LLC and the S corporation. A C corporation pays 21% before any dividends. An accountant can compare the options using your expected numbers.
• Will you raise money from investors? A C corporation can sell stock. An S corporation allows only one class of stock and no corporate or partnership shareholders. That limits who can invest.
• Who are the owners? A single owner, several owners and owners outside the US lead to different options. Nonresident aliens can't hold S corporation shares.
• Which state, and why? Some states limit the life of an LLC, and some don't recognize the S election. In our work with clients, most form the company in the state where they live. Banks may refuse an account or ask for more documents when the company is from another state. Some owners choose another state for tax reasons. That works if they understand what it changes.

In practice, a one-person service business testing an idea sometimes starts as a sole proprietorship. There's nothing to file, and the owner accepts personal liability in exchange. A business with real exposure has stronger reasons to look at an LLC or a corporation. Typical examples are trucking, logistics and construction. A startup that plans to raise investment usually looks at a C corporation because it can sell stock.

The week after filing: the paperwork around the company

Once the state approves your filing, you'll find there's more paperwork around the company. A newly formed LLC or corporation usually needs the items below. They don't follow a fixed order, and which ones apply depends on the business.

1. An EIN (Employer Identification Number). Partnerships, LLCs and corporations need one. The IRS issues it for free. You can also request one for banking or state tax purposes when it isn't federally required.
2. An operating agreement for an LLC or bylaws for a corporation. It sets out ownership, decisions and what happens when an owner leaves.
3. Licenses and permits, depending on the city, county, state and industry.
4. A tax election if you want one, within the deadlines above. That's Form 2553 for S corporation status or Form 8832 for corporate treatment of an LLC.
5. A DBA if the company sells under a different name.
6. State reports. Many states require an annual or periodic report and fee. The rules and amounts vary by state.
7. Bookkeeping and records.
8. An update to the IRS if the responsible party for the EIN changes, filed on Form 8822-B within 60 days.
9. An online presence, so customers can find and check the company. That can mean a website, directory listings and social media pages. It can also mean a Google Business Profile if the business is eligible.

The SBA also points owners to free help from:

1. SCORE
2. Small Business Development Centers
3. Women's Business Centers
4. Veterans Business Outreach Centers

A fuller list is in New Business Checklist: What to Do After Forming Your LLC.

If you're doing all this from outside the US

If you live outside the US, you can own a US LLC or C corporation. But several rules work differently for you. Nonresident aliens aren't allowed as S corporation shareholders. So in practice your choice is between an LLC and a C corporation.

The first wall you'll hit is usually the EIN. The online application needs a valid US tax number, which means an SSN, an ITIN or an EIN. A foreign owner without a US tax number doesn't have one. The IRS lets foreign applicants with no US presence apply in two other ways:

• by phone at 267-941-1099 (Monday to Friday, 6 a.m. to 11 p.m. Eastern time)
• by faxing Form SS-4

The IRS issues one EIN per responsible party per day.

The next surprise comes at tax time. A US corporation that's at least 25% foreign-owned must file Form 5472. So must a foreign-owned single-member LLC, which files it together with a pro forma Form 1120. This return can't be filed electronically.

The penalty for not filing or not keeping the required records is $25,000. If the failure continues more than 90 days after an IRS notice, a further $25,000 can apply for each 30-day period.

The mistakes that show up in year one

Most of the costly mistakes we see come from mixing up the legal form, the tax election and the name. The common ones are:

• Treating a DBA as protection. A sole proprietor with a DBA is still personally liable for business debts.
• Treating "S corp" as a type of company. It's a tax election, and the company still has to be formed as an LLC or a corporation with the state.
• Missing the S election window of 2 months and 15 days into the tax year. Late relief is possible within 3 years and 75 days of the effective date.
• Filing Form 2553 without every shareholder's signature.
• Ignoring the state's position on S corporations. Some states tax the business as a C corporation anyway.
• Missing Form 5472 as a foreign owner, with a penalty of $25,000.

Doing it yourself or getting help

Whether you handle this yourself depends on how much of the work around the filing you're ready to take on. A sole proprietorship needs no state filing, and you can form a basic LLC without outside help. The state filing itself takes the least time.

Most of the work is around it:

1. choosing the state, the name, the registered agent and the address
2. preparing the operating agreement
3. getting an EIN (by phone or fax if you have no SSN or ITIN)
4. arranging licenses
5. making tax elections on time

The bigger risks are in the decisions:

1. a structure that doesn't fit your plans
2. a missed election deadline
3. a filing like Form 5472 that nobody mentioned

Outside help with formation saves time on the paperwork. We register LLCs for new owners as part of a US launch, including owners abroad, and leave the tax choices to their accountant. For the tax side, a CPA or an enrolled agent can compare the options using your actual numbers.

What to do this week

Start with two questions: how much risk your business carries and how you want the profit taxed. The answers usually narrow the choice to one or two structures.

If you live outside the US, check the Form 5472 rule before you form anything. Before you file a tax election, run your real numbers with an accountant. And when your answers point to an entity, the next comparison worth reading is LLC vs Corporation.