If you’re planning on starting a new business, be it a large company or a new small business, you’re probably wondering whether you should form your company as a limited liability company (LLC) or “doing business as” (DBA).
While a “doing business as” name and an LLC allows you to conduct business under your name, you must understand that a DBA is a registered nickname while an LLC is, in fact, a business structure.
The following guide will help you understand the differences between LLCs and DBAs to make a well-informed decision.
What is an LLC?
LLCs or limited liability companies are legal business structures. LLCs may be owned by a single person or more than one person. As the name suggests, owners of an LLC have limited liability protection which means that their personal assets cannot be used in any way to pay off the business’s debts.
The IRS considers LLCs separate legal entities from their owners, creating a financial barrier between them and the company. If you own an LLC, your personal assets can never be touched; however, creditors can go after the company’s assets.
To start an LLC, you must operate your business under the name of the LLC and open up a separate business bank account under your company name.
- Limited liability: When compared to sole proprietorships that are liable for their own debts and the company’s debts, LLCs are only responsible for their own debts and obligations. Their personal assets are shielded from creditors in case of a lawsuit against the company.
- Tax benefits: LLCs can choose how they will be taxed, which is a huge advantage. LLCs may choose to be taxed as C corporations, S corporations, partnerships, or sole proprietorships. LLCs are pass-through entities meaning that the profits and losses are passed through to the members who report it on their individual tax returns.
- Less paperwork: When compared to corporations, LLCs must submit much less paperwork to form the business. They don’t have to hold annual meetings, keep records of meetings, file annual reports, etc.
- Management flexibility: LLCs don’t have to use a formal corporate structure. The owners have more choices on how the business is run when compared to corporations.
- Ownership flexibility: LLCs enjoy pass-through taxation without any limitations on the number or type of owners they can have in the business.
- Self-employment taxes: LLCs are subject to Medicare and Social Security taxes, which corporations only pay on salaries and non-profits.
- Fringe benefits: When LLC members receive medical reimbursement plans, group insurance, parking, and medical insurance, it is all regarded as taxable income.
- Immediate recognition of profits: LLCs are not subject to double taxation; therefore, the LLC profits are automatically included in the members’ income to be taxed.
Read more about LLC types.
What is a DBA?
A DBA is short for or an acronym for “doing business as” name and is also known as an assumed name, trade name, or fictitious business name.
A DBA is not a business structure or entity type but a registration that you file with your city, county, state licensing agency or secretary of state to transact under that specific name.
If you own an LLC or corporation, you must register a DBA before conducting business under any other name than the name you listed on your formation or legal documents.
One of the purposes of the DBA is to let the public know who they are doing business with if there is an issue or if they need to bring a lawsuit against the company.
When you register a DBA, your business name will be in the government database and available for the public to access and find out that you are the business owner.
- Low cost: A DBA is an inexpensive way to set up a business name. It becomes the legal name of your business once it’s been registered with the county clerk.
- Protection of privacy: DBAs are especially handy for sole proprietors and partnerships that want to keep their individual names private but still want to conduct business legally.
- Versatility: Instead of establishing separate business entities whenever you have a business idea or want to branch out, you can simply register fictitious names or DBAs.
- Flexibility: If the business name or legal entity name you’re considering is taken, a DBA name will allow you to expand into markets and other states where the desired legal name of your business is no longer available.
- Compliance: You can use the DBA name without incorporating it as an LLC or corporation when registering your DBA with the state.
- Banking: When you set up a DBA, you can open up a business bank account in the DBA name.
- No special tax benefits: Unlike when registering a legal business entity like a corporation or LLC, when you file a DBA, it doesn’t give you any special tax considerations.
- No trademark protection: Filing a DBA allows you to use that business name to conduct business. However, it doesn’t prevent other people from using the same name unless you register your business name as a trademark.
- Maintenance woes: When you file a DBA, the registration must be maintained every few years. Some states even require that your DBA name be registered in every county where conducting business.
- Geographical restrictions: If you want to do business in a different state, county, or city from where you registered your DBA, you’ll need to file your DBA in each of those regions before legally transacting.
At a glance: How is a DBA different from an LLC?
- Both LLCs and DBAs allow you to run your business under a different name; however, aside from that, there’s nothing similar about them.
- LLCs limit your personal liability regarding business debts and obligations, while DBAs do not give you any type of personal liability protection.
- It’s much more straightforward to set up a DBA than it is to set up an LLC. With a DBA, you simply need to pay a once-off registration fee, and there’s no need to complete or file any paperwork or comply with annual reporting requirements.
- There are no exclusive rights to your business name with a DBA; however, forming an LLC does give you protection.
- Whether you register an LLC or DBA, you need to get a federally registered trademark for the highest level of protection.
Should I register for a DBA?
A DBA can be helpful for many reasons. For one, it allows business owners to run their business under a different name without legally changing the company’s name.
If you’re already running an LLC but want to branch out of your current products and services under a different name, it’s a good solution.
If you’ve formed a partnership or sole proprietorship, you may not want to run your business under your personal name; in this case, a DBA is extremely helpful.
Unless you’re running a business under the official name, you will be required by law to register a DBA.
Read more about DBAs.
LLC vs. DBA
As mentioned earlier, there are quite a few benefits that the DBA and LLC offer. Let’s take a closer look at them below.
- Your filing requirements and business taxes will remain the same after filing a DBA. So if you owned a sole proprietorship before filing your DBA or trade name, you’d continue to report your losses and income on your personal tax return.
- LLC tax considerations after filing include filings with the Internal Revenue Service [IRS] and the state tax agency.
- Limited liability companies are considered pass-through entities by the IRS. This simply means that all business income is passed through to the members of the LLC to report on their personal income tax returns.
- You’ll also have the option to elect S corporation status or corporate tax treatment.
DBA vs. LLC: Registration and maintenance
- Both LLCs and DBAs are simple to register and renew. You’ll need to file the necessary documentation on the state level and pay the relevant filing fee.
- To maintain the registration, your paperwork must be filed on an annual or biannual basis. However, the state fees and the application process vary from one state to the next for both DBAs and LLCs.
- It costs far more to form an LLC than to file a DBA in nearly all cases. Registering a DBA doesn’t affect how you operate and run your day-to-day business activities. However, you’ll be able to do so under a different business name without risking your registration.
- When you form an LLC, you must approach the company as a separate business entity, or you could lose your personal liability protection or limited liability.
- You must separate your personal and business assets and create an LLC operating agreement to make sure that the roles and responsibilities of everyone involved are clearly outlined.
- Trademark protection is another option that you can use to keep other entities from using your business name to sell their goods and services. This is because a DBA filing does not offer trademark protection, which means anyone else can use your business name even if they are in the same city as your company.
- However, registering an LLC can prevent someone in the same state from using a business name. To have your company name protected nationally, reach out to the United States Trademark and Patent Office or USPTO and register your business name.
- LLCs offer Liability protection or legal protection, whereas DBAs do not.
- Suppose a lawsuit is brought against a limited liability company. In that case, the owner’s personal assets, such as your home, car, or bank account, cannot be used to pay off the debts and obligations of the business.
- However, when you file a DBA, there is no liability protection. If you don’t form a limited liability company or another business structure that offers limited liability, you will be responsible for business debts and obligations.
Whether or not to register a DBA after forming an LLC is entirely up to you. You’ll need to look at the advantages and drawbacks of doing so. In this case, a DBA offers several advantages and no drawbacks. So, in other words, an LLC will benefit from a DBA filing, especially when the company wants to branch out into new products and services. The DBA allows your limited liability company or your LLC to do so without creating a new business structure for each division.
An LLC is a type of business structure that offers personal asset protection for owners, also referred to as members. However, DBAs are not business structures or types of business entities. Instead, they are a registration with one purpose: to allow your business to transact under a different name from its legal entity name.
When it comes to the costs involved in filing a DBA compared to filing an LLC, a DBA is cheaper. On the other hand, an LLC is a legal business entity requiring you to go through the formation process and file more paperwork with the state.
An advantage of a DBA name is that it allows you to conduct business under the DBA without having to create a separate legal entity if you want to branch out. However, one of the disadvantages of a DBA name is that there are no exclusive rights to it, and any other business entity can use your name even in the same state unless you registered it as a trademark.
Filing a DBA is to inform the public that a specific person or entity is conducting business under that name and that it’s not the legal entity name. This is for this reason; DBAs fall under consumer protection laws.
DBAs cannot be formed as they are not business structures. However, you can file a DBA by completing the relevant forms and paying the necessary filing fee. After that, you will receive a DBA certificate to transact under that name. Depending on the state you’re filing the DBA, you may need to file with your county clerk’s office, local office, or state agency.