You’re from the generation that never depends on others. You’re looking for financial independence and you have an idea for the perfect business. When it is time to decide what type of company is best for you, however, you need a little guidance.
To make life easier, lawyer Jorge A. Rivera Febres, Executive Vice President and Director of the Legal Division of Banco Popular de Puerto Rico, explained the three ways you can operate your business.
Doing Business As or DBA
Under a DBA, an individual operates a business using a commercial name. This can be his or her real name (such as Juan del Pueblo), a variation of that (Juan del Pueblo Productions) or any other business name.
Using a DBA, all the income flows to the owner. For that reason, when it is time to pay taxes, you should do so as an individual, not as a company. This model may be best for small businesses that are beginning operations.
It’s not that easy, however. Among the disadvantages of a DBA is the personal responsibility you can incur for business activities. Any lawsuit, claim or obligation incurred by the business will be aimed at you personally and your assets.
Limited Liability Corporation or LLC
An LLC is a legal entity whose purpose is to protect its members from responsibilities that can be incurred as a result of the business’ activities. In other words, if there is a lawsuit or a claim, it is aimed at the LLC and not you personally, thus protecting your assets.
The LLC is flexible in its daily operations. The regulations and the documentation required to form and operate it are considered minimal in comparison to a corporation. In this type of business, you generally pay taxes as an individual, not a company.
A corporation is also a legal entity, but it is more rigid in terms of its operation. This means that, for example, you will have to establish a board of directors and hold periodic meetings with the board and shareholders. The corporation also requires more extensive documentation on the operations of the business. These are characteristics of a business of a larger scale and are necessary to attract capital and investors.
At tax time, the business will pay taxes on the income it generates, and you pay for the distributions you receive and the salary provided, if any.
The process of establishing your business is relatively simple. It can be done at the State Department at a cost that is minimal compared to the benefits received. You can also obtain information through the State Department web site, free of charge.
Contact your lawyer or financial adviser to advise you about the best way to establish your business.