Business Structure: Truth versus Myth

Myth #1: If you use your own name for your business name, there is no need to file a fictitious business name or DBA

Like many misconceptions, this one has a bit of truth to it. A business name that doesn't contain the legal name of its owner must be registered with the county clerk's office all across the United States as what is called either a fictitious business name or "doing business as" (DBA) filing. If your business name is different from your own name, filing a fictitious business name or DBA can allow you to deposit checks made out to your business in your personal accounts. But even if you use your own name—or part of your own name—for your business, you may still need to file a DBA in some states.

If you tack on words such as "and Company," "Group," or "and Sons" to your name, some states will require you to file a fictitious business name. Why? Because your company name may imply that other people are involved in running your company. Check with the local chapter of the Better Business Bureau or county clerk's office if you're unsure.

Myth #2: Sole proprietorships never need to file for business licenses

Never say never in business! In nearly every location in the United States, most businesses need a basic business license, which is sometimes also called a tax registration certificate. Check with the county clerk to see if you need to file a business license.

Just going through this process can be helpful because basic business licenses are usually required to get other kinds of licenses that you may need to run your venture. For example, if you plan to go into retail sales, you will probably need a sales tax license or seller's permit, which will allow you to collect sales taxes from your customers.

Myth #3: There is no protection for each partner in a basic partnership

This can be true—but it doesn't have to be. Going into a business relationship should include an agreement, and there are numerous standard partnership agreements available online. You can also draft your own agreement, which ideally should be looked at by an attorney, or at least notarized.

Partnership agreements are also very helpful in situations where people go into business with family members or friends. Putting expectations down on paper will help get your business up and running and hopefully prevent misunderstandings with partners that can hurt personal relationships.

Myth #4: Becoming a limited liability company (LLC) or corporation is expensive, complicated, and unnecessary

This is just plain untrue. There are a number of situations in which a small business should operate as an LLC or corporation. Liability is at the top of the list. While business insurance is something every venture should have, LLCs and corporations just offer more protection. Many small businesses—from roofing companies to bakeries—operate with some potential risk. LLCs and corporations reduce risk by insulating your personal assets (to some extent) from the risks of your business.

Don't forget the numerous tax advantages, either. But even if you're not in a position to turn your company into an LLC or corporation now, keep these options in mind as your business grows.

Myth #5: Limited liability protection covers everything

There's a reason the word "limited" is part of the term "limited liability." In some circumstances, the limited liability advantages of an LLC or corporation will not protect an owner's personal assets. An owner of an LLC or corporation can be held personally liable if he or she:

• Personally and directly injures someone
  
  
• Personally guarantees a bank loan or a business debt on which the company defaults
  
  
• Fails to deposit taxes withheld from employee wages
  
  
• Does something intentionally fraudulent or illegal that causes harm to the company or to someone else
  
  
• Generally treats the corporation as an extension of his or her personal affairs, rather than as a separate legal entity (for example, by using company funds for personal bills or gambling activities)

These are exceptional circumstances, and if you're like most small business owners, these scenarios are improbable. But they do show that treating your business as an extension of your personal affairs is just asking for trouble. Still, no matter how ethical you are about running your new venture, a liability insurance policy is a great way to shield your personal assets from business problems.

Myth #6: There's nothing to stop an LLC partner from killing the business by leaving

It can happen, but it doesn't have to be this way. It's true that under the laws of many states—unless your operating agreement says otherwise—the company dissolves when one partner wants to leave an LLC. When this happens, LLC members are required by law to fulfill any remaining business obligations, pay off all debts, and divide assets and profits among themselves. The remaining partners can then decide whether they want to start a new LLC to continue the business.

Your LLC operating agreement can keep your business going without this kind of disruption by including buyout provisions. These terms specify what will happen when a member retires, dies, becomes disabled, or leaves the LLC for some other reason.

Myth #7: An LLC or corporation must have more than one owner

No state requires an LLC or corporation to have more than one owner. For single-owner LLCs and corporations, the sole owner simply does all the preparation, signing, and filing of the necessary forms, such as articles of incorporation.

Myth #8: Corporations get taxed twice

This is another half-truth that many people believe is completely true. Here's why: if a regular corporation (also called a C-corporation, where the corporation is legally a separate "person" from its owners) pays dividends to its shareholders, these payments are taxed, along with business profits. Most small corporations, however, do not pay dividends, which spares these companies from double taxation. In these situations, a C-corporation is only taxed once—for its profits. The same goes for most small S-corporation structures, where the owners pay company taxes on their personal returns.

Myth #9: Filing articles of incorporation requires a lot of time-consuming and complex paperwork

Because the word "corporation" often conjures up images of multinational corporations with gigantic legal and accounting departments, you'd think this would be true. But it's not. To get started with the incorporation process, you file a short document (usually called articles of incorporation, but also sometimes called a certificate of incorporation, certification of formation, or charter) with the corporations division of your state government. This document contains basic information such as:

• The name of your corporation
  
  
• The corporation's address
  
  
• The name and address of the person who can be contacted by any member of the public who needs to speak to someone about the corporation

In some states, you will also need to include the names of the corporation's directors. You can usually prepare articles of incorporation in just a few minutes by filling out a form provided by your state's corporate filing office. Both C-corporations and S-corporations are required to take these steps.

Myth #10: Once a corporation is set up, most of the paperwork is done

People who own and run corporations wish this was the case. Because corporations have a number of operating and tax advantages, they must comply with a number of rules that don't affect other kinds of companies, such as LLCs and proprietorships.

For example, both C-corporations and S-corporations have to observe corporate formalities such as holding and taking minutes of annual shareholder and director meetings, as well as documenting important decisions. Also, C-corporations need to file and pay taxes on a separate corporate tax return and must set up a double-entry bookkeeping system to record business transactions, complete with daily journals and a general ledger. It's all part of the responsibility of running your own corporation.

To learn more, go to Intuit's MyCorporation to learn more about incorporation or about Intuit's filling services.