DBA vs. LLC

Starting a business means knowing things like what a DBA is vs. an LLC. Understanding the difference helps you to know your level of legal protections.

DBA: What Is It?

A DBA (doing business as), also referred as an assumed business or trade name, is a fictitious business set up by an individual who wishes to conduct business trade under a different name without having to create a separate business entity.

LLC: What Is It?

An LLC, or a limited liability company, operates essentially as a corporation, sole proprietorship, and partnership all in one. An LLC affords its members with limited liability, as they cannot be held personally liable for the company's debts.

Consider the Right Things for your Business

When beginning your business, it is important to consider which entity type would be most suitable for your business. A DBA is less expensive to initiate and maintain, while the advantages of an LLC come in the form of the business benefits and protection. As the benefits of a DBA and LLC vary, it's important to talk with a legal adviser or accountant before settling on your ultimate choice.

When considering whether a DBA or an LLC is the best entity type for your business, it is best to look at the benefits that each offer.

Benefits of an LLC

An LLC is a sole legal entity; the name you choose for your LLC is the legal name of your company. This means that the name of your company is the name you will use when conducting business. Some benefits of an LLC include:

  • Being registered as an LLC can help you gain credibility with potential customers, vendors, partners, and employees.
  • An LLC offers protection against personal liability, including personal assets; therefore, an LLC is the preferred business type when liability is an issue, i.e. when the company hires employees.
  • Owners will not be personally liable for decisions or actions taken by the LLC.
  • When your company expands, seeking funding is a much more straightforward process. It's much easier to sell an LLC than a DBA, which generally cannot be sold.

Benefits of a DBA

A DBA provides its own benefits to a business owner, including one main feature: It allows you to assume a different business name when conducting business. Therefore, if you plan on performing trade under an assumed name, then a DBA business entity is the right choice for you.

For example, if you named your company as your legal name (e.g., John Smith Company) and your type of business trade is in wood products, a DBA affords you to legally use a fictitious name (such as Industrial Wood Products) to do business. In other words, a DBA gives you the right to do business legally under an assumed name. And if you decide that you want to incorporate the DBA name to be used as a separate legal entity, you can do so once you legally use your DBA.

Contrary to an LLC, a DBA is not its own separate legal entity, and there is liability for the owner conducting business under the DBA.

Distinctions Between a DBA vs. LLC

The costs of registering a DBA are less than that of an LLC. Sole proprietors that do not want to pay the LLC fees and dedicate the time to fulfilling the subsequent requirements may choose a DBA, as they can still promote their brand and business. Furthermore, if you choose a DBA, it requires fewer legal procedures and registrations to follow.

A DBA is not a separate legal entity, whereas an LLC is registered as a sole legal entity under the law with a separate legal existence from its owner. Therefore, the requirements and rules for creating an LLC versus a DBA are different. As always, it is recommended to consult a legal professional prior to registering your business as a DBA or LLC.

Forming an LLC

LLCs are formed under state laws — which vary state by state — when an individual files the Articles of Organization with the Secretary of State's office in the state you choose to register. A name availability check can be conducted on the Secretary of State's website in order to ensure that the name is not currently being used. An LLC business owner is required to report any changes in address, membership, or service and must also file an annual report that includes important business and financial information.

The legal name of an LLC lasts until the business is dissolved. Once an LLC is in existence, the owner has the option of also filing a DBA to conduct business under a name different than the registered LLC business name.

Registering a DBA

The purpose of registering a DBA is to ensure transparency in the identity and business transactions of the company and the owner. The official name of the corporation or LLC is not changed under a DBA; rather, it only allows the company to use a different name when doing business.

DBAs must also be registered under state laws; however, the required documentation needed to register as a DBA is much less demanding than that for an LLC. A Certificate of Assumed Name needs to be filed by the business owner with the register of deeds in the county where the DBA will conduct business. It must be noted that under some state laws there are additional documents to file or the filing must take place with the Secretary of State or corporations. If your initial company is a foreign corporation or LLC, then additional filings may be necessary at the state level.

Depending on the state where the DBA is registered, the DBA filing may expire after a specified period of time. If this occurs, the underlying business needs to renew the DBA certificate with the same government agency where the original filing took place.

Taxation

The members of an LLC can choose whether they want to be taxed as a sole proprietorship, corporation, or partnership. LLC members owe Social Security and Medicare taxes, but such taxes can be paid through the members' self-employment tax form. There may be certain tax deductions that an LLC owner can use that cannot be deducted through a DBA. On the contrary, the DBA confers no special income tax status, meaning the owner must pay taxes in accordance with its own filing status.

Which Offers More Protection?

When you're trying to decide between a DBA vs. LLC, one of the most important factors to consider is what, if any, liability protections you will be provided. If you decide to file a DBA, you should be aware you will not receive liability protection from the actions of your business. This means if your business is ever sued, your personal assets, including your home and bank accounts, can be at risk.

DBA registration requirements are designed with transparency in mind. Doing business using an assumed name will not allow you to hide your actual identity, meaning creditors will still be able to pursue debts and you can still be personally sued.

If your business is a sole proprietorship, and you do business with a fictitious name, you can be held personally liable for the actions of your employees. This is much different than LLCs, where company owners cannot be held liable for the actions of the business.

Understanding the Different Types of Corporations

If you're interested in formalizing the structure of your business, incorporating is probably your best option. Learning about a few of the different types of corporations can help you make the correct decision for your business. By forming a traditional C corporation, you will create a legal business entity that is separate from its owners. The benefit of a C corporation is company shareholders will receive limited liability protections, meaning they cannot be personally sued for the debts of the company. A C corporation is the default entity created through incorporation.

After forming your C corporation, you can ease your tax burden by electing S corporation status with the IRS. If you are eligible for this election, it means your business will now be taxed as a flow-through entity. Essentially, with a flow-through entity, your business's losses and profits will be passed to shareholders and reported on their individual returns. Electing S corporation status will prevent double taxation, as the corporation itself will not be taxed.

Finally, as mentioned, you can incorporate your business as a limited liability. Forming an LLC is usually a good choice, as it provides the strengths of both C and S corporations. LLCs are taxed in the same way as S corporations and offers the liability protections of a C corporation.

C Corporations, S Corporations, and LLCs: Benefits and Drawbacks

Now that you know your incorporation options, it's a good idea to research the strengths and weaknesses of C corporations, S corporations, and limited liability companies. The biggest benefit of these three business structures is you will be shielded from personal liability, which is important if your business is in a volatile field. For a small business, forming an LLC or an S corporation is a smart choice.

Before forming an S corporation, you should consider the fact that shareholders count as company employees. This means that if any compensation is provided to shareholders, Medicare and Social Security taxes will apply. Remember, however, these taxes do not apply to distributions of profits and losses.

Members of an LLC are considered self-employed, which has tax implications. If an LLC member receives a share of company income, they must pay FICA and Social Security taxes on this income.

Choosing an LLC Name

If you decide to form an LLC, you must choose a name for your company. You should be sure the name you choose is unique. If you pick a name that has already been registered by another company, you will not be able to establish your LLC until you choose a new name.

Before you start working on your company's formation documents, you should perform an LLC name search to determine if the name you want for your company is available. Usually, the Secretary of State in your state will provide a database of registered business names. You can search this database for business names to make sure your company name is available. If your name is free to use, you may be able to reserve the name depending on the state where you are forming your LLC.

Cost and Timeframe

Several factors can impact the cost of your DBA filing. In particular, the cost of filing will be determined by the county where your business is located. Generally, you may pay as little as $10 or as much as $100 for your filing.

It's possible your DBA filing will eventually expire depending on the rules. No matter how long your DBA filing lasts, you will need to renew your filing after expiration if you want to continue doing business using your assumed name. You will need to renew your filing in the same location where the filing originally occurred.

Tips for Making Your Decision

Before you decide whether to incorporate your business or to file a DBA, there are a few important factors you should consider. First and foremost, you need to think about the specifics of your business, including your current financial situation. For a very small business with limited growth potential, a DBA filing may be a good choice. On the other hand, if you want to eventually expand your business, hire employees, and attract investors, you should think about starting an LLC.

If you're starting a new business project, you should keep in mind whether the name you have chosen indicates the purpose of your business. This is particularly important for LLCs, which are required to state a business purpose in their articles of organization. You should also weigh the benefits and drawbacks of creating a business subsidiary. In some cases, creating a subsidiary can be a better decision than starting a brand-new business.

If you have questions about how to structure your business, or if you're not quite sure whether an LLC or DBA filing is the right option for you, should get help from an experienced attorney. A knowledgeable business lawyer will be able to tell you about the benefits of each option, and can assist with your decision.

If you need additional help learning more about the difference between a DBA and LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.