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Updated: Sept. 19, 2024
After coming up with a solid business idea, a great business name, and a business plan, it’s equally as important to determine which business structure is best. There are a number of different business types, but usually, the choice boils down to filing a DBA or forming an LLC (Limited Liability Company).
In this post, we’ll answer the question, “What is a DBA?” and explain the difference between a DBA and an LLC. This will help you make the best possible decision for your small business.
Let’s get started!
DBA stands for “Doing Business As” and is basically an alias (or a fictitious name as it’s often called). A company is said to be “doing business as” when the name it uses to conduct business differs from its legal, registered name.
The most common example of a DBA is when a sole proprietor wants to run a business under a different name to protect their privacy or make themselves more marketable.
For example, let’s say you’re a sole proprietor of a construction company but don’t want to use your legal name, John King, to operate under. With a DBA, you can operate under something like “King & Sons Construction” or any other DBA name you come up with.
Many states require a DBA to be filed so consumers are not misled by a fictitious or alternative business name. A sole proprietorship is required to file a DBA if the company’s name is different from the owner’s name.
In the age of freelancing and side hustles, it’s easy to think you can start a new business free and clear without incorporating. But if you want to legitimize your business and protect yourself from lawsuits, forming a startup is the best decision you could ever make.
If you’re a freelancer or solopreneur, there’s no separation between your business and personal assets. So, if you’re ever targeted by a lawsuit (and lawyers love targeting small business owners), you risk losing EVERYTHING—your savings, home, retirement, and other personal property.
By forming an LLC, you’re creating a separate legal entity to protect your personal assets and reduce your liability for debts incurred by the business. LLCs also offer other benefits, including tax savings, privacy, brand protection, and access to business funding.
So, if you have an LLC, do you still need a DBA? The answer is yes and no. If you’ve registered your LLC, you don’t need to file for a DBA. But if your business is planning on operating under a different name (other than the registered name), then a DBA is required.
For example, if you registered your business as The Coffee Stop but want to operate under TheCoffeeStop.com, you’ll need to file a DBA.
At Inc Authority, we specialize in LLC formation and can get you started in a few simple steps. Did we mention that our LLC setup service is 100% free?
Now that we’ve answered “What’s a DBA?” let’s look at the differences between LLCs and DBAs.
The first difference is that LLC owners have limited liability protection for any credits or liabilities their company incurs since it’s a separate legal entity.
More importantly, creditors can’t pursue assets such as your bank account, car, and home to settle an LLC owner’s debts. A charging order can be obtained (if their home state allows it) to mandate LLCs to pay the amount an owner or member owes to a creditor.
DBAs lack the liability protection LLCs offer, which means business owners are held responsible for their venture’s assets and liabilities.
LLCs can have brand name or trademark exclusivity in their respective states, while a DBA does not have exclusivity.
Simply put, you hold no rights over a fictitious name, whereas registering an LLC allows you to prevent unauthorized use of its business name. Another way to protect an LLC’s name is to trademark it, usually done at the United States Trademark and Patent Office.
The DBA vs. LLC dilemma also covers registration and renewal. Both are registered with the state, which involves paying a filing fee. Many states also require businesses to renew their DBA and LLC registration annually (every year) or bi-annually (every two years). Filing and renewal fees vary by state, with LLC formation costing more in a majority of states.
Moreover, LLCs and businesses with DBAs are managed differently. Operations under DBAs can continue as usual, whereas LLCs must be separate from their owners.
If no separation is established between an LLC and its owner(s), it could reduce the legal protection you get. Maintaining LLCs comes with several important tasks, including separating personal and business assets and following company rules. For the latter, it can involve writing and following an operating agreement.
Businesses operating under a DBA remain subject to specific business taxes and filing requirements. Let’s say you’re a sole proprietor who filed for a DBA. After registering your fictitious business name with your state, you’re still required to report your income and losses on your personal tax return.
On the other hand, LLCs manage more tax-related requirements. They must file taxes with the Internal Revenue Service (IRS) and their local tax department and, in some cases, can choose to be taxed as a corporation. Furthermore, some states require LLCs to pay a franchise tax.
While DBAs and LLCs work differently, they still have some similarities.
For one, both allow you to use a business name for marketing and branding purposes. Most LLCs file new DBAs to offer multiple products and services instead of forming separate businesses for them.
DBAs and LLCs can also help you protect your privacy. With a DBA, you can choose not to run your business under your real name. Anonymous LLCs are another option for privacy, as forming one can help keep your personal information private. Currently, entrepreneurs can establish these LLCs in Delaware, New Mexico, Nevada, and Wyoming.
Thankfully, the requirements for DBAs are about the same in every state. As a matter of fact, to register an assumed business name, most states only require you to contact the county clerk’s office and pay a small filing fee that typically costs under $100. Some states even require you to publish a notice of your DBA filing in the newspaper and provide them with proof of publication afterward.
As far as LLCs go, the process is also similar. The only things that change from state to state are the filing and licensing fees. Contact your Secretary of State to learn more about these LLC fees.
LLC requirements only start to vary by state if you’re transferring a DBA to an LLC (a very common move). Let’s use Texas as an example. To transfer a DBA to an LLC, Texas will require an authorized party to file a new assumed name certificate with the state of Texas and local offices.
Another popular business structure to consider is a corporation. Corporations (like LLCs) are business entities separate from their shareholders or owners. Because of this separation, a shareholder or owner’s personal assets (such as their home, personal bank account, or automobile) aren’t at risk if the corporation or LLC is sued and a court judgment is entered against it for civil or financial liability.
LLCs and corporations also come with tax benefits that could reach thousands of dollars saved on income taxes annually.
On the other hand, a DBA offers no liability protection despite being the cheapest option to start a business and offering great flexibility. If you file a DBA and are sued, you can be held liable for your company’s legal challenges.
If you’re a solopreneur looking for a quick and easy way to launch your business, a DBA is a good option, but it shouldn’t be your long-term goal. Consider forming an LLC or corporation instead, so you can operate your business with peace of mind, knowing that your personal assets are protected.
Choosing the right business entity structure for your business is the most important step in the business formation process and sometimes the most stressful. But you don’t have to go at it alone!
Our experts at Inc Authority can help you make the best decision for your business. We also offer legal advice and a ton of business management tools to help make running your business a breeze!
Incorporating is the most powerful thing you can do to legitimize your business. And at IncAuthority.com, our setup LLC services are 100% free. Always. So, don’t wait. Form your free LLC today and enjoy the benefits of an LLC and the legal protection due to you and your business under the law.
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