Do you need a DBA or LLC? While that question may sound like an alphabetically infused riddle, it is an important question many new business owners ask.
Fortunately, the answer to that question is not puzzling after you have some basic information about what those acronyms mean and how they may impact a business. And that’s precisely what I’ll be discussing in this blog post.
The first thing I want to share is that DBA (doing business as) vs. LLC (limited liability company) is not exactly an apples-to-apples comparison.
A limited liability company (LLC) is a state-registered legal entity. Its official legal name is whatever name is approved on its formation documents (Articles of Organization). An LLC’s legal name does not have to include the name of its owners (members). The name can pretty much be whatever the owners want, provided the name is not:
- Prohibited by the state
- Already used by another business entity within the state of registration
- Already used by a business anywhere in the U.S. that has a registered trademark claim on the name
DBA stands for “Doing Business As.” It is a fictitious name registration (also known as a “trade name” or “assumed name”) that allows a sole proprietorship (or partnership) to operate their business under a name other than their owners’ names.
DBA Example #1:
Let’s say someone named Josie Newman wants to open a gift boutique. Rather than use a name like “Josie Newman’s Gift Shop,” she would instead like to put “Extraordinary Finds Gift Emporium” on her signs, business cards, website, and other marketing materials. Josie would need to file a DBA to request permission to conduct business under that fictitious name.
Likewise, a legal business entity (LLC or corporation) may file a DBA if the owners wish to conduct business under a name other than the legal one on the LLC formation or incorporation paperwork approved by the state.
DBA Example #2:
This time, let’s imagine that Josie Newman filed Articles of Organization with the state to form an LLC named “Extraordinary Finds Gift Emporium.” When the state approves her LLC, she may automatically use that business name in business activities. No DBA is necessary…unless she decides to branch out using a different name to expand her products or services. For example, if she wants to market interior design consulting services under the name “Extraordinary Home Decorating,” her LLC could file a DBA to gain the OK to do so.
States require that DBAs are registered so that the public and consumers know who owns and operates any business that uses a fictitious name. That disclosure is a means for helping to protect customers from shady entrepreneurs who have a reputation for doing business badly. Business owners may not use a term like “LLC” or “Inc.” behind a fictitious name because a DBA is not a legal entity’s name.
Comparing a DBA and an LLC
1. Formation Paperwork
Filing a DBA is a simple process, requiring completing and submitting a form to the Secretary of State or other business agency to request permission to use a desired fictitious name. Generally, states require a relatively minimal one-time fee (some have renewal requirements), and there are no ongoing business formalities associated with a DBA name.
Forming a limited liability company requires completing and filing Articles of Organization (or Certificate of Organization) with the state and paying a registration fee. There are numerous other filings, fees, reports, and requirements to fulfill, which vary by state and according to the business’s LLC Operating Agreement. Possibilities include:
- Designating a registered agent
- Obtaining business licenses and permits
- Applying for an EIN (Federal Tax ID Number)
- Filing Annual Reports
- Paying an LLC franchise tax
- Holding an Annual Meeting and recording minutes
2. Business Name Protection
When someone registers a DBA, it does not typically give them exclusive rights to use that name. Other companies may also be able to use the name in the state.
Establishing an LLC offers more business name protection because the state will not usually allow the formation of another company (or a DBA) with that same name. However, if a business name is used by a company that provides products or services very different from the LLC that wants to use the name, the state might allow both companies to use the name.
Business owners can apply for a federal trademark through the United States Patent and Trademark Office (USPTO) for more extensive business name protection. A registered trademark offers protection against other companies (no matter where they are in the U.S.) that offer similar products and services from using a trademarked name.
3. Business Owner Liability
An LLC is a legal entity independent of its owners. That means that under most circumstances, an LLC’s members are not personally liable for the debts or legal issues of the business.
A DBA does not make the business’s owners legally separated from the company’s liabilities. It’s merely a name, not an entity independent from the sole proprietor, partners, or business using it. So, if the business gets sued or runs into financial hardship, the business owners are personally liable. That can put their home and other property, retirement savings, bank accounts, and other assets at risk.
Sole proprietorships and partnerships that operate under a DBA only have one income tax option: they are taxed as pass-through entities, and all income and losses for the DBA flow through to the owners’ personal income tax returns. All business profits are subject to income tax and self-employment taxes (Medicare and Social Security).
LLCs that meet the IRS’s eligibility requirements have the option of electing S Corporation tax treatment. So, instead of all business profits being subject to Social Security and Medicare taxes, only owners’ wages and salaries have those taxes levied on them. For some entrepreneurs, this might lower their overall tax burden.
Pros and Cons Summary
To recap everything I’ve shared above, below is a glance at the potential advantages and drawbacks of a DBA vs. LLC.
- Simple, straightforward, inexpensive paperwork and process
- No entity business compliance requirements
- Provides some legal protection to prevent the name from being used by other businesses in the state
- Provides liability protection to business owners (because an LLC is a legal entity)
- May offer tax advantages (because an LLC may choose S Corp election if it meets IRS eligibility criteria)
- Does not provide legal ownership rights to the business name
- No liability protection to the business owner for the debts of and claims against the company (because a DBA is not an independent business entity)
- Requires more paperwork, cost, and time to establish
- Comes with ongoing business compliance requirements
Which Is the Right Choice?
That’s a question to discuss with an attorney, accountant, and tax advisor! There are legal and financial ramifications when choosing how to structure and name a business. So, entrepreneurs should seek licensed professionals who can assess their specific situation and guide them to what will offer the best results.
Know that CorpNet is here as a resource, too! We can help you with business name searches to explore if the name you wish to use is available. And, after you’ve gotten expert guidance from your lawyer and tax advisor, we can handle all your essential filings to get your DBA or LLC up and running.
Contact us for more information and to get started!