When starting a business, one of the first decisions to be made is what type of legal entity the business will be. DBA and LLC are two popular choices.
DBA stands for "Doing Business As," and LLC stands for "Limited Liability Company."
Both have their advantages and disadvantages, but some businesses might prefer one over the other when it comes time to make this decision.
We'll take a look at what DBA is, what an LLC is, and when you might want to choose DBA instead of an LLC in this article.
What is DBA?
A DBA is a name that is used when someone goes into business for themselves.
It's not the company's legal entity, but it allows them to do business under this other name instead of their own personal names or businesses.
Some states also use the term "fictitious name," "fictitious business name," "assumed business name," or "trade name" instead of DBA.
One example would be if you go out and get your own telephone line so you can have an independent telephone number during your new job search - in case there are any opportunities coming up while you're looking for work.
You might choose to use "Quadrant Consulting" as your phone number rather than using just your cell phone number because people will recognize this better since they'll remember what type of services Quadrant provides versus who actually owns this individual cellular service account.
What is LLC?
Unlike DBAs, LLCs represent a separate legal entity treated as a separate business entity under the law.
LLCs are taxed just like partnerships, sole proprietorships, or corporations by filing different IRS forms and registering with state agencies for tax purposes. The owners of an LLC are called "members."
There must be at least one person involved in order to file for this type of business name - it can't be filed in the name of only a company or corporation without partners/ownership involved.
Limited liability companies offer personal liability protection for their members.
This personal asset protection is beneficial to the owner's personal assets because LLCs are not taxed separately from their owners - they're considered pass-through entities, unlike corporations which require double taxation on profits and dividends paid out to shareholders or partners in an LLC.
Read More: LLC Managing Partners: Who Are They
The Advanatges of DBA
DBAs have their benefits which are why small business owners often consider setting up a DBA. The main reason why business owners opt for a DBA is to maintain privacy.
Additionally, companies often turn to a DBA to operate under a different name when they want to expand.
Business owners also choose a DBA when there is more than one owner of the company.
Things get complicated with legal documents, as this prevents any future disputes from arising.
The Disadvantages of DBA
DBAs don't represent a business structure that can protect the business owner or the business assets from being sued.
An owner of the company is held personally liable for all business debt and other liabilities, even if they have a DBA in place.
Using a DBA doesn't imply you are legally creating a separate entity from yourself or your partners.
This means that any debts incurred by the business will be taken out on each individual who owns part of it—not just one partner.
Another downside with DBAs is that if you do not pay tax under this structure, the IRS can target you as an individual instead of just going after your business's account information.
So while using a DBA may help avoid some complications when setting up paperwork, there are still ways the government could come after you directly, so tax flexibility isn't one of the perks of DBAs.
The last thing to keep in mind when choosing a DBA is that this might not be the best way to go about it if your business requires licensing.
The reason is that some states provide licenses only under one entity name—and using a DBA can mean having two separate names for each license instead of just one company name.
It's something to consider before making any final decisions on how to structure your business.
The Advantages of LLCs
Limited liability companies have several advantages over other forms of businesses, including:
- Limited personal asset protection for members of the LLC
- Pass-through taxation on profits and losses which avoid double taxation like corporations
- Flexible management structure to choose who makes decisions in the business (can be one member, several, or all) while an LLC requires at least two managing partners.
An LLC structure provides a lot of flexibility because it can be a sole proprietor, partnership, or corporation.
The important thing to remember is that the IRS does not recognize LLCs as separate tax entities from their members, and therefore they don't pay taxes directly as a business would.
Instead, all profits and losses of an LLC pass through to its owners, who then report them on his/her personal income tax return.
The Disadvantages of LLCs
LLCs also have a few downsides. They are more tax-intensive than a business entity that is taxed as a corporation.
The tax treatment of LLCs varies from state to state, and some states have very different tax rates for individuals versus entities.
There can also be personal income tax implications if the owner(s) take money out of their company's account or make distributions of profits to themselves personally.
In this case, it may also incur self-employment taxes on top of the ordinary individual income tax rates.
The Key Differences Between LLC vs. DBA
Taxes: DBA vs. LLC
DBAs are taxed as sole proprietorships, which means tax returns are filed as part of your personal tax return.
DBAs can be either an LLC, sole proprietorship, partnership, or corporation.
Your DBA name will be used every time your pay personal income taxes. Depending on your legal business entity type, you will have a different tax treatment from the Internal Revenue Service.
LLC tax treatment may differ depending on how they choose to file their taxes. If they decide to have the LLC taxed as a corporation, it will be taxed as a C or S corporation.
LLCs pay taxes on their own personal tax returns, and owners have to file tax forms according to the LLC's structure.
This information should be included in an operating agreement if there is more than one owner or member.
Filing Fees: DBA vs. LLC
The terms and conditions for establishing a DBA differ by state and county.
In some states, your DBA must be registered with the State Secretary of State or another government agency, so each county may have its own forms and costs for completing the procedure.
The cost of a DBA application is usually determined by the type and quantity of documents that must be submitted. In some cases, there are initial application costs as well as renewal DBA fees.
Filing fees for LLCs also vary by state. However, the total cost of official registration is typically higher than establishing a DBA because many states don't allow one-time filings that include all future renewal fees in addition to initial filing costs.
Naming Requirements: DBA vs. LLC
A DBA name does not need to contain "LLC" or any other legal term. However, you must use the legal business name on all documents that are filed with the state and/or county where it will be registered.
An LLC's legal name is typically more limited than a DBA name, so beginning a DBA with this type of information can help avoid confusion when filing paperwork for each entity at various locations throughout the country.
When you choose your "doing business as" name, be creative as long as it is permitted by your state, county, or city during the fictitious name registration procedure.
If your established business isn't a corporation, you cannot use terms like "incorporation," "Inc.," or "Corp." in your DBA name.
You can also use the same name for your DBA that you use for your LLC. You cannot use names, which are already in use when filing the paperwork or similar to an existing business with a state license where it will be registered.
When purchasing fictitious business name forms online, contact customer service if needed before completing these registration procedures.
However, for privacy reasons, a lot of business owners choose not to use their personal names for either LLC or DBA.
Who Should Form a DBA?
If a business owner wants to set up a sole proprietorship but doesn't want to use their personal name for the business, they will have to file for a DBA.
DBAs allow owners to use a fictitious name without having to go through the filing process for an LLC.
If you have multiple businesses and want to test new business ventures, DBA is a great option.
However, if you are unsure how to choose a name for your business, it is best practice not to use multiple DBAs simultaneously.
It creates more work for yourself and may cause additional problems later down the road with trademarking of names or other issues that can arise from having too many businesses under one roof.
Who Should Form an LLC?
Suppose you're considering a business structure that will allow other members to join the management, or you plan to hire employees.
In that case, LLC offers more flexibility than a sole proprietorship or DBA.
If you want to keep your personal assets separate from your business assets, you should conduct business through a limited liability company.
Personal liability protection is one of the key benefits when you form an LLC, especially if you have partners.
That way, you are protected from company debts or any malpractice that takes place in the business.
Does DBA Need a Registered Agent?
No, you don't need a DBA for an existing LLC or other business structures, provided that you already have one.
Can a Business Operate as a DBA and an LLC?
Yes, you can register as a DBA with your LLC.
Can You Open a Bank Account Under a DBA?
Yes, a DBA is sufficient to open a business bank account as a sole proprietor.
Does a DBA Need an Employer Identification Number?
No. Employer identification numbers are used by the IRS to collect taxes from business entities. DBAs are simply a filing requirement for a business name.
Does a DBA Offer Legal Protection?
No. A DBA doesn't provide the same legal protection and helps you remove personal assets from the company's debts as an LLC.
Is LLC Better Than DBA for an Online Business?
You can have both, but keep in mind that the limited liability protection LLCs offer shields you against.
Your online presence will largely dictate how you want to impact your customers, so operating under a DBA could be a good idea in some situations, while it can be disastrous in others.
You can add a DBA to your LLC and use it just as a name for your business. It does not have any legal meaning other than being the assumed or fictitious name of an entity that conducts business in its own right, usually with some form of trade name under which they do business.
On the other hand, an LLC is different because it's a structure that can offer liability protection to its members and pass-through taxation benefits and ownership restrictions on transfers.
This means you need more information about what type of entity will work best for you before choosing one over another.