Compare and Contrast: DBA vs LLC When Starting A Business
While an LLC may make sense for another business, you may be better off choosing a DBA. Or you may want to become an LLC and file a DBA. Let’s compare a DBA vs. LLC so you can make an informed decision for your situation.
LLC vs DBA: The Real Questions
Before you decide between an LLC or DBA, it’s important to familiarize yourself with both options. This way you can understand the LLC vs. DBA pros and cons. Once you do, ask yourself which pros are most important to you and which cons you can look past.
Then, you can choose the best option for your business. Remember that the way you set up and run your business can impact your current and future growth. So if you’d like to meet your business goals, put a great deal of thought and consideration into this decision.
What Is An LLC?
A Limited Liability Company (LLC) is a business that operates as a separate legal entity from its owner. In this setup, there must be members or a manager. Members are considered the owners of the business while a manager may or may not be a member.
If you open an LLC, you must conduct business under the legal name that you register under. Depending on the state you live in, you’ll likely have to perform a name check before choosing a name. This way you can avoid selecting the same name as another LLC that already exists.
Since an LLC is a separate legal entity, it’ll protect your business assets. Under an LLC, you won’t be the only one responsible for any losses or fraud your business experiences. Insead, all of the members of your LLC will be held jointly accountable.
What Is A DBA?
DBA is an acronym for “Doing Business As.” It allows a business to operate under a different name than its legal name. For example, if John Doe wants to operate his marketing business as JD Marketing, he’ll be required to file for a DBA.
Although a DBA doesn’t form a legal business entity, it gives you the right to carry your business under a different name than your personal name. At its core, a DBA is an official registration of your business name that you can use to run your business.
With a DBA, you can legally change your name and business with minimal formality. Since you aren’t bound by limited liability, your business assets won’t receive any protection. This means you’ll be obligated to repay any losses you face.
A DBA can also give you the opportunity to open a business bank account and collect payment in your business name. It eliminates the need to incorporate or form an LLC. If you start a DBA, you can operate as a sole proprietor or an LLC.
Considerations For Your Business
Now that you understand the definition of a DBA and LLC, consider the following:
- Do you want your business to seem professional? If so, an LLC may be the ideal option.
- Is your goal to earn more suppliers, lenders, and customers? An LLC can help you do so.
- Would you like to protect your business assets and avoid lawsuits? If the answer is “yes,” an LLC is ideal.
- Do you have a nickname that you want to use to represent your business? With a DBA, you can do that.
- Do you want to minimize your expenses and paperwork while juggling several projects? A DBA may be the ultimate solution.
- Do you want to operate multiple businesses or websites? Filing for a DBA is highly recommended.
- Would you like to open a business bank account but continue as a sole proprietor? If you decide to go the DBA route, you’ll be able to.
If you consider these questions, you’ll find it far easier to select the best option for your new business.
Benefits Of LLCs
The most noteworthy benefits of an LLC include:
- Liability Protection: An LLC can limit your liability as a business owner. For instance, if a customer sustains injury after using your product, an LLC can prevent them from going after you personally. With an LLC, you can also protect yourself from unpaid business debts (unless you personally guarantee them) and vendor disputes.
- Easy Set Up: In most states, it’s a breeze to create an LLC. You can complete the filing process online in just a few minutes. Once you do, you’ll need to visit the IRS website to apply for an Employer Identification Number (EIN).
- No Member or Partner Restrictions: You can set up an LLC with yourself as the sole member or with as many members as you’d like. Just keep in mind that the more members you have, the more difficult administration becomes.
- Tax Flexibility: As an LLC, you’ll have the option to decide whether you want to be taxed as a sole proprietorship, partnership, S corporation, or corporation. This flexibility can save you big money on your taxes.
- Continuous Existence: If you open an LLC, it can continue to exist even after you sell your shares or pass away, just like a corporation.
- Investor Participation: Your LLC members can be investors and have minimal to no say in the day-to-day operations of the business. The only caveat is that this must be clearly outlined in your operating agreement.
Benefits of DBAs
DBAs come with several key advantages such as:
- Privacy Protection: If you’re a sole proprietor or a part of a partnership, a DBA can help protect your privacy. For instance, if you operate under “Joe Doe,” you can expect to get plenty of phone calls, postcards, and catalogs. Unfortunately, they’ll be from individuals and businesses trying to sell you something rather than customers who are interested in your product or service. With a DBA, you can eliminate much of this unwanted contact.
- Easy Branding: As a DBA, you’ll find it far easier to brand for various target markets. This is particularly important if you have different lines of business. Let’s say you sell jewelry online, a DBA would allow you to create different brand names and websites for necklaces, bracelets, and earrings.
- Business Bank Account: A DBA allows you to keep your personal assets separate from your business finances. If you have a DBA, you’ll be allowed to open a business bank account. This won’t be the case if you’re a sole proprietor or a part of a partnership.
- Simple Filing: The process of implementing a DBA is fairly straightforward. While requirements vary from state to state, you’ll likely be able to file one in no time.
DBA vs LLC Distinctions
There are numerous DBA vs LLC distinctions that are vital to understand. First and foremost, a DBA isn’t a separate legal entity. An LLC, however, is a sole legal entity that exists separately from its owner.
If you opt for an LLC, you’ll need to use it on any paperwork that requires your legal identification such as tax returns and business permits. For this reason, there are different rules and requirements for forming an LLC vs. DBA.
Also, it’s less expensive to register a DBA than an LLC. If you’re a sole proprietor who doesn’t want to pay LLC fees and meet certain legal procedures, a DBA may be the better option. With a DBA, you can still promote your business and brand. The only major downfall is that you won’t receive any liability protection.
It’s important to note that many businesses are an LLC and have a DBA. Often times, a single business may have multiple DBAs. That being said, you don’t need an LLC to have a DBA as any type of business structure has the freedom to apply for a DBA.
How To Form An LLC
To form an LLC, follow these steps.
- Choose Your State: It’s wise to form your LLC in the state you reside and plan to run your business in. If your business has a physical presence in more than one state, you’ll be required to register a foreign LLC in every state it operates.
- Name Your LLC: Naming rules vary from state to state but generally, your name must include “LLC” or the phrase “Limited Liability Company.” Also, it can’t include any words like FBI or State Department that may confuse your business with a government entity.
- Select a Registered Agent: The individual or business that sends and receives legal documents for you is known as a registered agent. You can appoint yourself or your business to be its own registered agent, depending on where you live.
- File Your LLC: To file your LLC, you’ll have to complete a document called the Articles of Organization, Certificate of Formation, or Certificate of Organization. You’ll do this with the Secretary of State’s office in the state you operate in. Fortunately, most states allow you to do this online.
- Receive an EIN: If you have an LLC, you can choose an EIN as a social security number. You’ll need it to open a business bank account and hire employees. To obtain an EIN, visit the IRS website and complete the online application.
Registering A DBA
Here’s what you’ll need to do to register a DBA:
- Understand Your State’s Requirements: Usually, a DBA is filed with a local or county agency. Contact your Secretary of State or County Clerk to determine what’s required to register a DBA in your specific area.
- Choose Your Name: Brainstorm a few name ideas and check with your state or county’s records to make sure your top name hasn’t already been taken.
- Complete the Necessary Forms: Once you understand the DBA requirements in your area and choose a name, complete the required forms. Most states and counties have the forms available online so you can easily download and fill them out.
- File Forms: After your forms are completed, you’ll need to file them with the right state or county agency. During this time, you’ll pay a fee that will range from $10 to $100. It may take anywhere from one to four weeks for you to receive approval.
- Publish Notice: Your state or county may ask you to publish your DBA with a local newspaper to create a public record of the filing.
Notes Regarding Taxes
If you become an LLC, you’ll have the flexibility of being taxed as a sole proprietor, partnership, or corporation.
An LLC comes with a “pass-through taxation” so any money it earns will simply pass through to the personal income taxes of its members. Your profits and losses will get passed through to your income and you won’t have to face corporate taxes. Also, you may be eligible for certain tax deductions that wouldn’t work for someone with an DBA.
On the other hand, if you file a DBA, you won’t qualify for a special income tax status. Therefore, you’ll pay taxes based on your own filing status. So if you’re a sole proprietor, you’ll be taxed as one, just like any other proprietor without a DBA. The downside is that won’t be able to save as much on taxes as an LLC.
Of course, it’s in your best interest to consult a CPA or accounting professional to make sure you fully understand how an LLC or DBA would impact your tax situation.
Some Final Thoughts
While DBAs and LLCs have similarities, there are several notable differences between them. Once you understand both options, you can select the ideal one for your business.
Although it’s more costly to file an LLC and than a DBA, the limited liability protection may make it worthwhile. If you’re unsure of the best route to take, speak to a small business attorney and others in your industry. They can steer you in the right direction.
At Fora Financial, we strive to help business owners succeed. Sign up for our newsletter today for more business tips.
Frequently Asked Questions
What is an LLC?
LLC stands for Limited Liability Company and is the easiest way to structure your business if you’d like to protect your assets. It’s considered a separate legal entity.
What is DBA?
If you have a DBA or Doing Business As, you operate under a different name than your legal name. With a DBA, you’re personally liable for your business.
How do taxes differ for a DBA and LLC?
You’ll report your profits on your personal tax returns if you function as a DBA and be subject to all income and self-employment taxes. If you have an LLC, however, you have tax options and the potential to save money on your taxes.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.