Making the Leap from DBA to Corporation: Small Business Edition

It isn’t a far stretch to assume that most businesses start out with few employees. Many times small businesses start as just the owner filing for a DBA (Doing Business As) and filing taxes as such.

But as time goes on and the business grows, business owners have to start considering chaining the status of their business for tax and liability reasons. In doing so, some businesses find the benefits of restructuring the business and file the necessary documents to become a corporation. Is filing as a corporation right for you?

What is a corporation?

In the event that a business takes on more than one owner (or multiple owners), becoming a corporation makes the most sense. Generally speaking, the law (and the state in which the business exists) sees the business as a ‘person’ rather than just the individuals. And like a person/adult, a corporation is treated independently and has individual rights and responsibilities. When you file to become a corporation, this business entity is ‘born’ and must have a legal name, again, much lie a person.

Once the corporation is formed, it becomes separate from its owner; responsible for its own debt and is then the corporation is responsible, not the stockholders, if a bank needs to take action against it.

Shares and Ownership

At the onset a corporation issues shares of ownerships for the principles involved. These stockholders, or principles, invest money in the business. Effective documentation of these stocks then state the name of the owner(s). In keeping consistent with the law, a corporation then keeps a register of how many shares each owner has. Essentially, one share of stock is considered one unit of ownership. The ‘amount of ownership’ therefore depends on the number of units, or shares, that an individual has in their possession. The more shares a business issues, the smaller the percentage of an owners’ equity per share is worth.

Classes of Stock in a Corporation

When stocks/units are issued to an individual, one must be mindful of the various classes of stock they have in their ownership portfolio. For example, Preferred stockholders are promised a set amount of dividends each year. At the most risk are the Common stockholders. If the corporation finds itself in financial trouble, liabilities are paid off first, having an effect on the value of the stocks that Common stockholders own. Once liabilities are settled, what’s left would be divided amongst Common stockholders.

Its Confusing But a Financially Sound Decision

Being a small business owner who is experiencing growth is no easy thing. Compound that with the administrative side of business and mistakes are easy to come by. One benefit of incorporating is the protection of personal assets. Additionally, your taxes might work out better in your favor, but be sure to speak with your accountant when incorporating your business.

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