LLCs (Limited Liability Companies) and DBAs (Doing Business As) are two of the most common business structures for people starting their businesses. While both designations have their benefits and drawbacks, they also differ in terms of legal and tax implications. Read more to determine which is right for you.
LLC Vs. DBA: Overview
Before diving into the differences between a DBA vs. LLC, let's define each business structure:
What’s a DBA? (Doing Business As)
- DBA: A DBA allows you to run your business under a name different from your legal name or your business' registered legal name. As a "nickname" for your business, it protects your identity from being outright associated with your business, but it doesn't provide legal liability protection like an LLC does.
- Liability: With a DBA, there is no legal distinction between the business owner and the business. This means the owner is responsible for all the business's debts and liabilities.
- Taxes: Income from the business is reported on the owner's personal tax return, as there is no separation between the business and the individual.
- Best for: Small side businesses or sole proprietorships where the owner is comfortable with personal liability and seeks minimal regulatory paperwork.
What’s an LLC (Limited Liability Company)
- LLC: An LLC makes your business a separate legal entity, separating your personal assets from your business assets. That means if your business owes money or gets into a lawsuit, your personal assets will be protected from creditors.
- Liability: Owners (members) of an LLC are typically not personally responsible for the business's debts and liabilities. This protection is one of the primary reasons business owners choose to form an LLC.
- Taxes: LLCs enjoy pass-through taxation by default, meaning the business is not taxed directly. Instead, profits and losses are passed to the owners' personal tax returns. However, an LLC can also choose to be taxed as a corporation.
- Best for: Businesses seeking liability protection, management and tax options flexibility, and a more formal business structure than a sole proprietorship or partnership.
Differences between DBA and LLC
Choosing between a DBA (Doing Business As) and an LLC (Limited Liability Company) depends on several factors, including your business needs, liability concerns, tax implications, and the level of operational complexity you're prepared to manage. There are three key differences between DBA and LLC business structures:
- Liability protection: Liability protection refers to protecting your assets from the debts and legal obligations of your business. When you form an LLC, your business has its own legal existence that is separate from you as the owner. This means that if your business owes money, your personal assets cannot be seized. In contrast, a DBA does not provide personal liability protection, so you'll be held personally responsible.
- Flexibility: A DBA is a simpler and more flexible business structure, as it allows you to operate under a different name without having to create a separate legal entity for your business. This can be useful for sole proprietors or freelancers who do not require the legal protections of an LLC. An LLC, on the other hand, is more complex to set up and maintain.
- Tax implications: Both a DBA and an LLC are considered pass-through entities for tax purposes, which means that your business profits and losses are reported on your personal tax return. However, an LLC has more tax flexibility, as you can choose to be taxed as a sole proprietorship, partnership, or corporation.
Generally speaking, a DBA is more appropriate for low-risk, solely owned businesses like freelancers. An LLC is more appropriate for higher-risk businesses with complex structures and multiple owners who want peace of mind and liability protection.
Pros and Cons of DBA vs LLC
This table provides a clear overview of the advantages and disadvantages of each structure, making it easier to decide which one best suits your needs.
|Affordable to register and maintain
|Greater taxation flexibility
|Minimal paperwork and regulatory requirements
|More business credibility
|Flexible ownership options
|No public disclosure requirements
|Expensive to set up and maintain
|No liability protection
|More regulatory requirements
|Must report business on your personal tax return
|Limited lifespan depending on the state
|Lower credibility as it’s a less formal structure
|Public disclosure of ownership is required under certain states
|Risk of commingling personal and business assets
How Taxes Work for DBAs and LLCs
Understanding how taxes work for DBAs and LLCs is crucial for business owners. Here's a simplified breakdown of the tax implications for each structure:
A DBA is not a separate legal entity, so the owners are responsible for the taxes. If a sole proprietor owns the DBA, they report the income and expenses on their personal income tax return using Schedule C. If a partnership or another legal entity owns the DBA, the owner must report the taxes on the suitable tax form for that owning entity.
LLCs offer more flexibility when it comes to taxes. Single-member LLCs default to the sole proprietorship tax structure, while multi-member LLCs adopt the partnership tax structure. However, LLCs can also choose to be taxed as a corporation.
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Here's a quick overview of each taxation method:
- Sole Proprietorship/Partnership: The owner or partners report income and expenses on their tax returns, with profits subject to self-employment taxes.
- C Corporation: The business is taxed separately from you as the owner. This means that the business's profits are subject to corporate taxes, and if you want to distribute those profits to yourself as dividends, you will be taxed again on that income at the individual level.
- S Corporation: The LLC avoids double taxation by passing profits directly to the owners, who report the income on their tax returns. This method also allows owners to avoid self-employment taxes on a portion of their income.
When choosing a tax structure for your LLC, it's essential to consult with a tax professional to ensure you're making the most advantageous choice for your specific situation.
Whether registering a DBA or forming an LLC, following the proper steps to ensure your business is legally compliant is essential.
Here's a step-by-step guide to help you navigate the filing requirements for both DBAs and LLCs:
DBA Filing Requirements:
- Choose a business name: Pick a unique name that reflects your business and complies with state rules.
- Check name availability: Verify that your chosen name is not already in use by another business.
- Register your DBA: Complete the necessary forms and submit them to your local county or state office, depending on your jurisdiction.
- Publish a notice: Some states require you to publish a notice in a local newspaper announcing your intention to use a DBA.
- Maintain DBA registration: Keep your DBA registration up-to-date by renewing it as required by your state.
LLC Filing Requirements:
- Choose a business name: Select a unique name that complies with your state's LLC naming rules.
- Check name availability: Confirm that another business does not already take your chosen name.
- Appoint a registered agent: Designate a person or entity to receive legal documents on behalf of your LLC. Many LLCs choose a third-party to provide this service so that their personal finances and identity are protected. Note that the registered agent must have a physical address in the state where our LLC is formed.
- File Articles of Organization: Complete the required forms to formally create your LLC and submit them to your state's Secretary of State or equivalent office.
- Create an Operating Agreement: Draft an agreement outlining your LLC's rules and structure. Even though not every state requires it, having one can be helpful. It can help clarify the rights and responsibilities of the LLC's owners in case of disputes.
- Obtain an EIN: Apply for an Employer Identification Number (EIN) from the IRS to enable tax filing and reporting. This is similar to a Social Security Number, just for your business.
- Comply with additional state requirements: Depending on your state, you may need to obtain licenses, permits, or fulfill other requirements to operate your business legally.
Read more here: How do you Register an LLC for your Business?
DBA vs. LLC Cost
When starting a business, it's crucial to consider the costs associated with establishing your chosen business structure. Here's a breakdown of the expenses you may encounter when forming a DBA or LLC:
- Filing fees: Depending on your jurisdiction, filing fees for a DBA can range from $10 to $100.
- Publication fees: If required by your state, the cost of publishing a DBA notice in a local newspaper can vary from $40 to $200.
- Renewal fees: Some states mandate periodic DBA renewals, which can incur additional fees.
- Filing Fees: The cost of filing Articles of Organization varies by state, typically ranging from $50 to $500.
- Registered agent fees: If you choose to hire a professional registered agent service, expect to pay between $100 and $300 annually.
- Annual report fees: Some states require LLCs to submit annual reports, which can involve fees ranging from $20 to $200.
- State-specific fees: Depending on your state, additional fees or taxes, such as franchise taxes or business licensing fees, may apply.
Remember, these costs can vary depending on your location and specific business needs, so it's essential to research your state's requirements to estimate your expenses accurately.
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Choosing between a DBA and an LLC for your business structure is an important decision that can significantly impact your operations, liability protection, and tax obligations. As you've seen throughout this article, both options have pros and cons. DBAs offer simplicity and lower costs, making them ideal for small businesses and sole proprietors. On the other hand, LLCs provide stronger liability protection and more flexibility in taxation, making them more suitable for businesses with higher risk or more complex operations.
Before deciding, it's crucial to consider your specific business needs, the level of legal protection you require, and your tax preferences. Consult with a professional advisor, such as an attorney or accountant, to ensure you make an informed choice tailored to your unique circumstances. By taking the time to understand the differences between DBAs and LLCs, you'll be better equipped to choose the right business structure for your venture and set yourself up for success.
What are the benefits of a DBA?
A DBA (Doing Business As) offers several benefits including the ability to operate your business under a name different from your legal name. It is relatively simple and affordable to file for a DBA.
Are DBAs worth it?
DBAs can be worth it for small businesses and sole proprietors who want a simple and affordable way to operate under a different business name without a formal legal structure. However, keep in mind that DBAs do not provide liability protection like LLCs do.
Does each LLC need its own bank account?
Yes, each LLC should have a separate bank account to keep business and personal finances separate, which is critical for maintaining liability protection and making tax filing easier.
What is a DBA for an LLC?
An LLC can use a DBA to operate under a different name than its legally registered name. This can be helpful for branding purposes or if the LLC wants to operate multiple businesses under different names while maintaining a single legal entity.
What is an umbrella LLC structure?
An umbrella LLC structure is a situation where one LLC (the parent) owns one or more subsidiary LLCs. This setup can help streamline management and provide a consolidated liability protection and taxation approach. It is often used by businesses with multiple, distinct operations or when expanding into new ventures.