From taxes to liability, there are a lot of considerations that go into deciding which business structure is right for you. To make the decision even more complicated, there’s a great deal of confusion regarding the differences between a DBA versus an LLC.
Don’t panic—everything you need to know is laid out in this article.
Together, we’ll cover topics ranging from taxation, liability, and control in further detail.
DBA is an acronym for “doing business as.” It’s a registered business name, fictitious business name, or assumed business name.
However, it’s important to note that a DBA isn’t a legal business structure. A DBA allows a business to operate under a name that’s different from its legal name.
It has many uses for different business structures, including LLC partnerships, corporations, and single-member LLC or multi-member LLCs. Sole proprietorships (who must use their own name for their business) can use a DBA if they want to trade under a more professional business name.
Note that, while you can have a DBA for your LLC, this post will mainly focus on the differences between a DBA alone and an LLC, including the benefits and disadvantages.
First, some general things to note about who can use a DBA.
A sole proprietor can file a DBA and use a professional-looking business name without creating a formal legal entity, like an LLC or corporation. Informal business structures like partnerships and sole proprietorships can also use a DBA for banking, privacy, and branding.
And, filing a DBA is a popular choice for business owners who invest in a franchise. For example, a KFC franchise person could register their business as ‘Jill’s Fine Food LLC’ but use their DBA to trade under the KFC brand.
To break it down, a DBA offers 4 main benefits:
There are 3 main downsides to a DBA:
Registering a DBA doesn’t provide trademark protection, which means anyone can use a similar business name in your state, county, city, or town.
To stop others from using your business name, you must get trademark protection and secure your name on a national level.
You trademark your name by registering it with the United States Trademark and Patent Office.
A limited liability company (LLC) is a hybrid entity that combines the characteristics of a corporation with those of a sole proprietorship or partnership.
An LLC is a separate entity from its owner, who creates it by registering articles of organization with their state.
Once approved, an LLC can assist in protecting owners from personal responsibility for its liabilities in cases of debt and litigation.
The LLC business structure is flexible in design, enabling all types of small to medium businesses to protect and scale their business. Businesses of all sizes can register as an LLC structure. From single-owner operations to multi-member organizations, including tradespeople, doctors, property owners, and e-commerce entrepreneurs.
An LLC suits anyone who wants to keep the ease of a disregarded entity, gain limited liability protection, and increase the credibility of their business.
And when we look at a DBA vs. LLC, the benefits of creating an LLC structure for your business become clear.
An LLC provides owners with limited liability, that if maintained properly, can help protect their assets should another company or person sue them. And the structure can also protect its members from liability caused by other owners or employees within the company.
The low cost to form an LLC in comparison to a corporation is one of the reasons why many small business owners chose it as their business structure.
For example: You must file an article of organization to register your business with your state, which can cost as little as $100, depending on your location.
And you’ll need to appoint a registered agent to receive official mail. You can act as the agent or outsource the service for around $150 per year.
The LLC’s flexible structure enables you to start a business alone or with other members.
An operating agreement removes state default rules and allows owners to say how they’ll run their business. An operating agreement itself is flexible; you can amend it to suit your business as it grows.
LLC members can choose how to allocate profits and losses regardless of their percentage of ownership, such as when each member gets paid and how much.
An LLC is a designated entity, also known as flow-through or pass-through depending on your state.
This means the LLC does not own the profits or pay tax; both pass through to the members who then report their income and tax liability on their tax return.
Most states allow you to complete and file your articles of organization online via your secretary of state’s website. Once filed, you must apply for an EIN from the IRS website.
You must include “LLC” or limited liability in your name (unless you register a DBA). Having that’s a good thing because seeing LLC after a business name automatically instills trust and a sense of professionalism.
They might not know how or why, but it shows that the owner took the time, money, and energy to form a legal business entity. And that’s the right first impression to make.
As with all things in life (and business), there are always some downsides.
With an LLC, you have higher set-up and ongoing maintenance costs than you would trading as a sole proprietorship using a DBA. Transferring ownership (if you sell) can be tricky, and you’ll have problems raising funds from venture capitalists.
Registering an LLC costs vary by state, but in most cases, the requirements remain the same. Here are some to look for when you register your LLC:
Ownership in an LLC is often more complex to transfer than with a corporation because a corporation’s shareholders can sell their shares to someone else.
But with an LLC, all members must agree upon adding a new member or altering any ownership percentages of its original members.
A multi-member LLC can avoid internal disputes by recording how any transfer will occur in their operating agreement.
You can transfer ownership in 2 ways:
A venture capitalist fund can’t invest in designated entities like an LLC because the profits pass through to the owners, creating what’s known as UBTI (unrelated business taxable income).
Because venture capitalist’s partners are tax-exempt, they can’t receive business income or active trade.
However, an LLC can raise funds by obtaining a business loan or taking on a partner and selling a percentage.
An LLC and a DBA allow you to run your business using a different name, but the similarities end there.
Let’s look closer look at where they differ:
A DBA is easier and less expensive to set up than an LLC.
Setting up a DBA requires a one-time fee, plus you aren’t required to file business formation paperwork or comply with annual reporting requirements.
A DBA is cheaper to establish than an LLC. The average price ranges from $10 to $100, whereas an LLC can cost $100 to $500 depending on the state.
The most significant difference between a DBA and an LLC is liability protection.
A DBA offers no distinction between the business and the owner, who is liable for all debts and expenses incurred by the business.
On the other hand, an LLC can increase the odds of its member’s private assets remaining secure even if the business goes into debt or faces litigation.
All business structures can use a DBA for branding purposes. However, only a registered business, like an LLC, can ensure that someone else in their state doesn’t use their name.
Business owners who want to secure their brand’s DBA or legal entity name must register it as a trade name at the federal level.
You usually file a DBA at the county level where your business is located.
However, suppose you want to incorporate in multiple states under your business name but use names that reflect each state. In that case, you can register a DBA name in each location.
The fictitious business name filing process varies from state to state and even county to county.
LLC business owners who want to trade in another state can register their business in that state or file as a foreign LLC.
A DBA allows a partnership or sole proprietorship to receive and deposit checks using their fictitious name to any account associated with their DBA.
But an LLC owner can open an account using their LLC registered business name, saving them the expense of creating a DBA.
The fictitious business name filing process varies from state to state and even county to county.
LLC business owners who want to trade in another state can register their business in that state or file as a foreign LLC.
A DBA provides an excellent alternative for sole proprietors or partnerships who don’t want to meet the legal procedures and pay the fees of forming an LLC.
But a DBA isn’t a bona fide business structure, and when you start a business it’s often more beneficial to choose a legal entity like an LLC.
There are a few key considerations when choosing between a DBA or an LLC.
The first being that a DBA is only a registered business name. It’s not separate from the owner and doesn’t provide limited liability protection.
Meanwhile, an LLC provides credibility, more funding options due to your legal status, and asset protection.
But at the end of the day, choosing one over the other comes down to your business requirements and future entrepreneurial aspirations. In many cases, an LLC is more beneficial and worthwhile. Even though there are more fees to creating an LLC than a DBA, what you get for your money is excellent value.
A DBA provides an excellent alternative for sole proprietors or partnerships who don’t want to meet the legal procedures and pay the fees of forming an LLC.
But a DBA isn’t a bona fide business structure, and when you start a business it’s often more beneficial to choose a legal entity like an LLC.
There are a few key considerations when choosing between a DBA or an LLC.
The first being that a DBA is only a registered business name. It’s not separate from the owner and doesn’t provide limited liability protection.
Meanwhile, an LLC provides credibility, more funding options due to your legal status, and asset protection.
But at the end of the day, choosing one over the other comes down to your business requirements and future entrepreneurial aspirations. In many cases, an LLC is more beneficial and worthwhile. Even though there are more fees to creating an LLC than a DBA, what you get for your money is excellent value.
This portion of our website is for informational purposes only. Tailor Brands is not a law firm, and none of the information on this website constitutes or is intended to convey legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness. It also does not indicate any affiliation between Tailor Brands and any other brands, services or logos.
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