Often, aspiring businessmen wonder which type of business is better to choose: DBA or LLC. In fact, there is already a mistake in this question.
A DBA cannot be called a separate business structure. It is simply a fictitious name, which is also called a trade or brand name, under which you can conduct business. Meanwhile, you can choose any suitable entity type: sole proprietorship, LLC, partnership, or corporation.
What Is a DBA?
A DBA (doing business as) is not a business structure. It is a trade, brand, or simply an alternative name under which you are allowed to do business.
For example, John Smith registers a DBA under the name "ABC Cleaning" because he intends to provide cleaning services:
- He gets the right to do business under the name "ABC Cleaning";
- The name gets protection so competitors cannot use the same DBA;
- He can register a bank account in the name of "ABC Cleaning" and receive payments.
But John Smith remains a sole proprietor as a matter of law. He pays taxes as a sole proprietor and is personally responsible for his business.
Note! A DBA does not provide protection for the owner's personal assets in the event of business distress.
What Is an LLC?
An LLC (limited liability company) is a distinct business structure that differs from sole proprietorships, partnerships, or corporations.
- An LLC allows owners to conduct business and also gives them the right to register a DBA. This is convenient if a company is growing and needs to be rebranded. DBA is often used if the official name is too long or inconvenient for marketing purposes;
- LLS is managed by the founder or a hired manager and can have one or more members or other staff if needed. But it is obliged to keep more complicated accounts and pay an annual state fee;
- On the other hand, the reporting and management structure of an LLC is simpler than that of a corporation;
- An LLC has a flexible tax structure. This allows you to get certain tax benefits (such as operating as an S corporation). A sole proprietor with a DBA registered has no such options;
- An LLC protects the personal assets of its members as long as they do not violate the "corporate veil" rules. So, if you open a separate business account, don't use company funds for personal purposes.
DBA vs LLC: Registration
An individual entrepreneur in the U.S. does not need to register a business, draft Articles of Organization, and pay the registration fee. But if you want to use a DBA, some of these steps will have to be taken.
For comparison, let's take a look at what you need for DBA registration:
- Come up with a name and make sure it's legitimate (it should not duplicate the name of the company operating in this region). Most often, a DBA is filed at the county level;
- With the LLC name registration, you cannot use certain words. For example, it should not imply that your business is associated with the state or conducts activities requiring a license without having one;
- Apply for registration and pay the state fee;
- In some states, you will have to renew your DBA every few years.
LLC registration has similar steps, but the process is a bit more complicated:
- You have to come up with a name. But there will be more restrictions. For example, you will need to specify the type of ownership (LLC, L.L.C., or limited liability company);
- You have to appoint a registered agent and fill in the Articles of Organization and Operating Agreement. The forms are not complicated even for novice businessmen;
- You also need to pay the state fee. The total amount is usually higher than in the case of DBA registration;
- Obtain an EIN (counterpart of SSN for legal entities);
- Submit annual reports on time and pay fees if the state laws stipulate that;
- If an LLС plans to use a DBA, its registration will need to be done separately. You will also be required to pay a fee and confirm the ownership of the registered name systematically.
The similarities in the registration stages cause the confusion that we have mentioned at the very beginning of this article. But you have to clearly understand that a DBA is NOT a type of business.
Why Entrepreneurs Choose a DBA
A DBA for a sole proprietor is an opportunity to get a nice name for the business, protect privacy, and also save time and money on registration. This way, you can avoid the complication of reporting and additional fees.
There are different options for using a DBA:
- The name reflects the scope of business. At any time, you can change the DBA if you start selling other goods or providing additional services. This way, you will inform old and new clients about your field of activity in the most convenient form;
- A memorable name. If you're selling something unique or special, a DBA can help build your distinctive brand. Once you form an LLC or corporation, you can register the same DBA for them;
- Maintaining anonymity. DBAs get the right to have a bank account, and your customers will pay bills in the company's name. This creates the illusion of personal asset protection.
DBA for LLC: Why Do You Need It?
Even though LLCs already have separate legal names, there are still nuances with regard to this.
- The LLC name doesn't look attractive on the signboard, promotional materials, or website. All states require the abbreviation LLC or the full name of the business type to be added to the company name. With a DBA, you can avoid it;
- Changing activities or expanding the business. Instead of re-registering the LLC, it is much easier and cheaper to register a new DBA which will reflect the information relevant to customers;
- Brand building. If an LLC is actively growing, the issue of brand building becomes extremely relevant. You can create several LLCs in different states. In some of them, the name you need will not be available, and a DBA will help solve the problem.
If you are planning to grow your business under a particular brand, a DBA may not be enough for that. A DBA is simply permission to do business in the state under a certain name. If your brand needs protection, you have to think about registering your trademark.
Another key aspect of using a DBA for an LLC has to do with protecting business assets. It's not uncommon for business owners to open several separate LLCs in order to protect a part of the business in case of possible problems. But they use the same DBA for all LLCs.
This is acceptable in most states, and only the consent of the companies already operating under that brand name is needed. But in case of problems with one of the LLCs, which operates under the chosen DBA, there is a high chance that other LLCs will also be affected.
Bottom Line: DBA vs LLC
If you are just starting out in business, the question of whether it is worth registering an LLC or a DBA is extremely relevant.
When you should use a DBA:
- You are operating as a sole proprietor without employees or assistants;
- You don't have extra money to pay high fees and don't want to learn the reporting and accounting specifics;
- You prefer to send the usual personal income tax report;
- Your business carries minimal financial risks. It's easier for you to pay the costs out of your personal savings than to pay an annual fee to the state.
As you can see, DBA registration is optimal for small businesses where risks are minimal and claims are most often compensated voluntarily and even without going to court.
In other cases, it is much more advantageous to start an LLC:
- You form your brand as a legal entity. Most likely, you will not need DBA, but you can register it at any time if needed;
- You get the protection of your personal assets. If the company goes bankrupt, your funds will be untouchable;
- Banks are more lenient with LLCs when it comes to raising loans for business development;
- An LLC inspires more confidence among clients and partners;
- An LLC has a flexible taxation structure.
All these factors fully compensate for the additional costs and time required for registration, as well as the need to keep accounting and send reports to the Secretary of State.
Therefore, in the overwhelming majority of cases, experts recommend setting up an LLC for both experienced and startup businessmen.