Choosing a structure for your small business based on tax implications explained by Westford, Massachusetts tax attorney, Timothy Lau
Tim Lau, owner and managing attorney of Lau Legal Services in Westford, MA, spoke for the National Financial Literacy Campaign at a workshop for Spanish-speaking small business owners. Tim educated the group on understanding business structures and their tax implications, helping attendees learn how to choose between an LLC, DBA, and S-Corp.
Here’s the key takeaways if you’re a small business owner trying to choose a structure:
DBA - Doing Business As
A business name, not a business entity
A DBA is a registered name used to operate a business under a name other than its legal name. A person conducting business under a name other than their own (the business name) generally must file a business certificate with the city or town clerk where the business is conducted, subject to statutory exceptions. A DBA does not have personal liability protection and the underlying owner or entity determines the tax treatment.
LLC – Limited Liability Company
A separate legal entity formed under state law
An LLC is a legal entity created by filing a Certificate of Organization with the Secretary of State Office. Generally, a limited liability company protects owners from personal liability for business obligations, meaning personal assets are protected if the business owes money.
LLC Liability Protection is not absolute. An LLC provides liability protection, not immunity. Courts may disregard the LLC's separate existence in exceptional circumstances such as:
Mixing Funds: Commingling personal and business finances
Poor Records: Failing to maintain adequate business records
Misusing the LLC: Using the entity to facilitate wrongdoing
Personal Guarantee: Owners may be personally liable for debts they personally guarantee.
Federal tax treatment depends on ownership and tax elections; an LLC is a legal structure, not a single federal tax classification and forming an LLC does not automatically reduce your taxes.
S-Corp: What Does It Cost?
Potential tax savings come with additional responsibilities.
In order for registration as an S-Corp to make sense for a business, they must have the following:
Payroll: Reasonable W-2 compensation, payroll processing, and employment taxes.
Bookkeeping: Accurate records of wages, distributions, profits, and shareholder basis.
Tax Returns: Annual Form 1120-S, Schedule K-1, and applicable state filings.
Ongoing Compliance: Payroll filings, tax deposits, deadlines, and professional fees.
An S-Corp makes sense for businesses with consistent business profits, profit remaining after reasonable compensation, and potential tax savings exceed added costs. It does not make sense if a business has low or inconsistent profits, little profit after a reasonable salary, or if compliance costs outweigh tax savings.
Three Things to Remember:
DBA: Business Name
A name alone does not create liability protection.
LLC: Legal Structure
Generally, protects owners from business liabilities, subject to exceptions.
S-Corp: Federal Tax Classification
May reduce certain taxes, but adds responsibilities and costs.
One business can have all three.
Choose your business structure intentionally, understand your responsibilities, and revisit your decisions as your business grows.
