Should My Small Business Form as a DBA, LLC, or Both?
Many small business owners wonder about the best way to set up their company. Two popular options for establishing the company as a separate entity are to register it as “doing business as" (DBA) or a limited liability company (LLC). While both DBAs and LLCs are registered with the state and allow you to conduct business using a new name, only the LLC allows you to protect your assets from business creditors.
The decision can influence liability protection, tax flexibility, and more. Let's dive into the differences and help you choose what's best for your startup.
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What Is a DBA?
DBA stands for “doing business as." It's an acronym for a fictitious business name that entrepreneurs use. DBAs are common in the business world. They are sometimes referred to as trade names, fictitious names, or assumed names because they let an individual or business operate under a name that is different than their legal name.
Filing a DBA is done at the state level. There are often state fees involved. Depending on where you live, you establish your DBA by registering it with your city, county, or state licensing agency.
Additionally, most states require that you complete registration before you start operating the business under the new name. This is because DBAs protect the public by letting them look up who owns a business should they want to pursue legal action against it. It's crucial to check with the secretary of state in your area about the specific DBA filing process.
DBA registration lets you conduct business under a different name, but it provides no other benefits for companies or their owners. A DBA does not offer any tax advantage for business owners and does not protect owners from liability for the actions of the new business.
DBAs: Lack of Liability Protection
One major thing to understand about DBAs is that they don't provide liability protection. This means if someone sues the business, they can go after the owner's personal assets. For example, if a sole proprietor wants to operate under a name different from their personal name, they get a DBA. This means if someone sues the business, they can go after the owner's personal assets.
Since there's no shield between the business and the owner, the risk of personal financial loss is greater. It's a common misconception that a DBA offers the same legal protection as entities like LLCs, but this is not the case.
What Is an LLC?
LLC stands for “limited liability company." An LLC is a business that has registered with the state to operate as an organization that is legally separate from its owners. As a separate entity, an LLC can own property and enter into business agreements. Additionally, the owners of an LLC are not liable for the business's debts beyond what they invested in the company.
When it comes to taxes, LLCs operate as pass-through entities. That means the company itself pays no tax, and any profits or losses it has are passed through to the owners without the business being taxed. The owners then include the LLCs' profits or losses on their federal income tax returns.
The owners of an LLC can also choose to have it taxed like a corporation, in which case its income will be subject to the federal corporate tax when earned by the company. It is then taxed again when distributed to its owners.
The primary disadvantage of operating a business as an LLC as opposed to a DBA is that you will need to follow certain business formalities to maintain its status as an entity separate from its owners. For example, LLC owners are usually required to have a registered agent, file articles of organization with the state, file annual reports, and pay annual filing fees.
Tax Flexibility: DBAs vs. LLCs
When it comes to taxes, DBAs and LLCs are treated differently. A DBA is not a separate legal entity, so the income and expenses of a business using a DBA flow directly to the owner's personal tax return. In other words, with a DBA, you're taxed as a sole proprietor by default.
On the other hand, an LLC offers tax flexibility. While an LLC can be taxed as a sole proprietorship if there's only one member, it has the option to be taxed as a corporation or a partnership if there are multiple members. This means LLC members can choose the tax treatment that is most beneficial for their business, which can lead to potential tax benefits that a DBA doesn't offer.
Furthermore, some states may have additional tax advantages for LLCs. This emphasizes the importance of understanding your state's specific tax regulations. Consult with a tax professional or a business formation lawyer when deciding between a DBA and an LLC.
Operating as Both a DBA and LLC
An LLC can have a DBA. This is useful when the LLC wants to operate under a different brand name. If you have already formed an LLC, you can still register a DBA with the state if you do not want the company to operate under its own name. LLCs will often register new DBAs when they want to offer products or services under a separate business name without creating a new LLC for each business.
Having both an LLC and DBA offers the benefits of an LLC's liability protection while also giving the flexibility to use different business names. However, remember that the DBA itself doesn't give any legal protection. That comes from the LLC. When opening a business bank account or getting business licenses, the DBA name and the LLC name might both be used.
Need Help Deciding Between a DBA and an LLC? Get Legal Help
If you don't know whether operating your business as a DBA or an LLC is best for your company, getting legal help from a local business attorney can help. A lawyer can assist you in determining whether a DBA or an LLC is best for both the business and its owners and in completing the paperwork necessary to file with the state for whichever business structure you decide on.
If you decide to operate the business as an LLC, an attorney can verify that you are following all of the rules and regulations to ensure that you are protected from personal liability for the company's debts and obligations. They can also make sure your operating agreement for your business entity is what you need it to be.
If you know which type of business you would like to form and you would prefer to DIY, consider using a reputable business formation service like the one we offer.