Want to understand the variations here between DBA and an LLC? You’ve found the right place. If you’re starting a brick-and-mortar store, an internet store, or a side hustle as a freelancer, you need to decide whether a corporation or as a a sole proprietor is the best legal structure for your company.
The 2022 guide to understand the key differences between a DBA and an LLC and how they differ in terms of formation, taxes, and legal protection.
Summary
What exactly is an LLC?
A limited liability company, sometimes known as an LLC, is a legal entity that is founded by the state. A limited liability company (LLC) is a distinct entity from its owners, who are referred to as members. On the other hand, members do not individually assume responsibility for the debts and obligations of the firm. Instead, the responsibility falls on the LLC.
What is a DBA?
DBA means “doing business as.” A DBA is any registered name that a business operates under that isn’t its legal business name. A DBA is sometimes called a trade name, fictitious name, or assumed name. DBAs can be used by sole proprietorships, partnerships, the self employed, LLCs, and corporations.
LLC vs. DBA
The biggest difference between a DBA and those looking to start an LLC is liability protection. A DBA isn’t a company structure and doesn’t provide any personal asset protection such as an LLC or corporation.
Under a DBA, there is no distinction between the business owner and the business. The business owner is liable for all expenses incurred on behalf of the business. On the other hand, an LLC provides limited liability protection.
There are mainly two reasons why you would need a DBA:
- You have a registered formal business entity looking to branch out into new products, services or brands, or to rebrand in general.
- You have an unregistered business such as sole proprietorships or partnership and would like to operate under a name other than your personal name. This option should only be used by businesses with very low profit and risk.
LLC vs. DBA differences
The following is a comparison of the key differences:
| LLC | DBA | |
| Personal liability | Not liable for business debts and liabilities | Personally liable for business debts |
| Brand name | Yes | Yes |
| Mixing business funds and personal finances | Not permitted | Permitted |
| Taxation | Profits taxed once via pass-through taxation on the owner’s personal returns | Profits taxed once via pass-through taxation. No option to file as a corp |
| Fees | Pay an initial filing fee from $50-$500. | No costs. To register a DBA can range from $10-$120 |
LLC vs. DBA setup
The procedure of establishing your DBA is substantially simpler than that of forming your LLC. You invest a one-off charge and are not obliged to complete any paperwork or meet any yearly reporting obligations.
Typically, establishing a DBA doesn’t grant your business sole rights for using your brand names. Starting an LLC provides you with additional security since it prevents another company organization from being formed in the state using the same corporate name as yours.
However, neither provides the same amount of protection as a nationally registered trademark.
LLC vs. DBA taxation
Also, changing to a DBA will not affect the amount of taxes your business must pay. It is still your responsibility to file tax returns as a single proprietor if you choose to operate under a DBA.
A firm that has one owner may continue to pay taxes as a sole proprietor, whereas a business with several owners can continue to pay taxes as a partnership or corporation.
As an LLC owner, you may decide whether your business will be treated as just a C corp or S corp for tax purposes. In certain cases, a company’s tax bill might be reduced. Unlike forming a DBA, which is a very simple process, establishing an LLC requires additional paperwork.
A limited liability company (LLC) is a type of business entity that can be formed for a variety of reasons, the most common of which are the desire for limited liability protection, the need to protect the personal assets of the business’s owners, and the desire to take advantage of various tax benefits provided by state and federal governments.
Benefits of a DBA
A DBA can accomplish several things for a business owner.
- Rebranding a company: A DBA is an excellent way for your organization to alter the firm’s direction, including rebranding itself without forming a new corporation
- Distinguish between multiple companies: A DBA also comes in handy for entrepreneurs who want to distinguish among their numerous businesses.
- Build a brand: If you’re a sole proprietor, registering a DBA gives you the chance to build a brand under a name you choose instead of using your personal name. This helps you reach target customers and gets your brand out there in a way that benefits your business.
Business name registration
State regulation of LLCs include required words which must be included in an LLC name i.e. “LLC” or “limited liability company” might be required at the end of an LLC’s name. Registering your LLC does give your name protection within your state.
If the business owner plans on operating under a company name, instead of under their own name, they will need to register for a “fictitious business name,” or DBA (“doing business as”), in their home state.
Tax Implications for DBAs vs LLCs
By default, all profits made by an LLC are only taxed once. This is known as pass-through taxation. As the owner, the tax liability belongs to you and passes through your individual tax returns.
To file taxes, you report your operating results, including profit or loss, by submitting Profit or Loss From Business (Sole Proprietorship) (Form 1040, Schedule C) with your personal 1040 tax return. An LLC is very flexible and can get taxed as sole proprietorships, a partnership, or a corporation.
DBA’s don’t have to file separate taxes – taxes for money generated through a DBA will be included as a part of the business return. However, the frequency of taxes are filed depends on the way the business is structured. A sole proprietorship files taxes annually unless the business makes no income all year.
It can be easier for DBA’s to keep its business and personal affairs separate if you obtain an Employee Identification Number (EIN). But keep in mind that whether or not a business has a DBA, the IRS does not require a sole proprietorship to obtain an EIN.
You can use your Social Security number when you file your taxes. However, sometimes banks require a business to have an EIN to open a business bank account. Having an EIN and a business bank account establishes legitimacy for your business.
An LLC can have tax advantages but any benefits will be dependent on the specific situation and it isn’t necessarily always the case, especially when you factor in the fees associated with operating an LLC.
Whether an LLC is better for taxes depends on multiple factors, including your profit, expenses, and the kind of work you do.
Forming a DBA vs LLC
Forming your LLC requires you to file Articles of Organization, sometimes called a Certificate of Organization, with the state. Requirements vary by state.
Typically, an LLC operating agreement is drawn up to document the members’ and managers’ rights and duties. You should also expect to file certain forms with your state agency, typically the State Secretary, and pay an initial filing fee that can range from $50 to $500.
LLCs also have to file annual or periodic reports and pay a required filing fee in most states.
Setting up a DBA is relatively easy. You can enlist the help of a professional legal services provider also.
Here are some general steps you need to follow, but there may be state-specific requirements that you can likely find on the respective Secretary of State’s website.
- Search your name: Make certain the DBA name you want isn’t already being used. You can usually conduct a business entity search on the Secretary of State’s website.
- Review the naming requirements of your state: In general, you may not use banking-related words or terms that could be associated with a governmental entity.
- Fulfill operating requirements: Some states do insist you operate under your DBA before registering it. Examples of operation might be printing out business cards, brochures, and labels.
- Register your DBA with the Secretary of State or Local Government Agency: You can usually fill out a form online or via mail.
When should I setup my DBA?
If you are a sole proprietor or a partner in a business, you may want to register a DBA for your company so that you can market and do business under a moniker other than your personal name.
If you already have a firm set up, such an LLC, but want to expand into other markets under a different name, a DBA is a great way to do it. If you run a child-minding business and also wish to sell baby clothing, a DBA will let you do so while continuing operating under the initial company structure.
DBAs are also helpful for franchisees who wish to use the name and brand recognition of an established company without giving up ownership of the franchise firm.
For convenience’s sake, many company owners, especially independent contractors, register their businesses under a DBA. Those just starting out in company will appreciate how little paperwork is involved and how little money must be spent in order to have their business up and running.
But an LLC is typically a good choice for a small company owner because of the indemnification and tax versatility it provides. Regardless of the situation, it’s always a good idea to see a lawyer before making any major decisions so that you can go over all the details of your own liability protection.
Converting a DBA over to an LLC
This is a real possibility. If you start a company as a DBA, you may always establish an LLC later if you determine the business structure is better for your firm.
Filing a DBA
Compared to founding an LLC, establishing a DBA is quite simple. DBA filing requirements might vary by both state and industry.
It’s possible that you’ll have to publish notice of a DBA in a local newspaper in addition to filing the paperwork with the state and any applicable local governments. A one-off fee will be required of approximately $210.
What is a DBA example?
Sole proprietors often choose to operate under a DBA name. E.g. A business owner John Doe might file the Doing Business As name “Doe Roofing.”
How is a DBA different to an LLC?
Liability protection is the main feature of a DBA over an LLC. Since the owner and the company are treated as one in the DBA example, the owner must personally guarantee all business debts. With an LLC, your personal assets are shielded from any potential lawsuits.
What is the advantage of having a DBA?
DBAs can be helpful for many reasons and can allow owners to conduct business using an alternative name without legally changing the name of their company. Most states require a DBA registration if you’ll be doing business operating under a name other than your own name or your official business name.
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