DBA vs LLC: The Differences You Need To Know

10

Min Read

Tom Smery

What’s the difference between a DBA vs LLC? What are the benefits of one over the other and which one should you choose for your business? These are all questions that new entrepreneurs struggle with and, by the end of this post, we hope you will have the answers you seek.

But even before we get deep into the details, there is one thing I need to clarify. This is not an either-or choice. You cannot decide to register your business as a DBA instead of an LLC. Why? Because a DBA is not a recognized business entity/business structure.

There are only four legal business structures and these are Sole Proprietorship, Partnership, Limited Liability Company (LLC), and Corporation.

What’s a DBA then? That’s what we will be discussing next. Then, we will tell you the differences between a DBA and an LLC after that to help you decide when each suits your business.

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What is a DBA?

DBA stands for “doing business as” and it allows you to do business with a name that’s different from your legal name.

Different states may have different names for DBAs but the meaning is the same. For instance, In Illinois, it’s an assumed name, in Colorado, it’s a trade name, and in Florida, it’s a fictitious name.

Is it better to have an LLC or DBA?

Now, as we mentioned, a DBA is not a legal business structure and, therefore, it can’t exist on its own.

First, you have to register your business as one of the four recognized business structures, and then, you can file for a DBA if you wish to conduct business in another legal name other than the registered name.

This is especially common among Sole Proprietorships since the law requires that they register their business using the legal names on their ID. That’s not really good for brand visibility, right? If you are offering physiotherapy services, a name like Tender Touch Physiotherapy clinic makes more sense than say, Joleen’s Clinic.

For LLCs, it's different because you aren’t obligated to use your real names but there are still situations where you might want to use a different name for your business.

Like if you want to expand your services. Let’s say Tender Touch Physiotherapy Clinic is an LLC and wants to expand to offer more services like eye care. Instead of going through the process of forming a new LLC or reforming your current LLC to accommodate the new services, you can file a DBA which will allow you to use a different name for your business.

Another instance when adding a DBA to your LLC may be necessary is if you are expanding to a new state and your original LLC name is already owned by another business in that state. In this case, the legal documents will be signed using your original LLC name but they will show that you are doing business as, “the new name that you choose.”

What are the pros and cons of a DBA vs LLC?

Why is it that we recommend filing a DBA for your LLC in certain instances when you could just open a new LLC? It’s because a DBA has some benefits over an LLC. In the next section, we explore these advantages as well as disadvantages.

What are the advantages of a DBA?

Let's quickly review some of the benefits when you register a DBA.

Very easy and inexpensive to form

Although there are fees for both a DBA and an LLC, in comparison, DBAs are very easy to form. There's a reason why many sole proprietors or freelancers opt for this. There is less paperwork involved, the cost is lower, and it takes less time to have the DBA approved. Also, in most cases, there are no recurring operational fees for DBAs. You just pay the initial filing fees and you are ready to go. You don't even need a separate employer identification number because DBAs are not a business entity.

Some cities require you to publish your DBA name and intent of your business in your local newspaper.

Minimal operational requirements

When you are running a DBA you are not required to adhere to the same strict regulations that govern LLCs. For instance, you don’t have to do annual reports that highlight all your business activities within that year and changes within your organization. You also don’t need a registered agent to receive official documents for your DBA.

Multiple DBAs in one filing

You can have several DBAs under one LLC and you don’t have to file separately for each one of them. This is perfect if you have multiple businesses running under one LLC. It means you give each business a name that best reflects its operations without registering it as a standalone LLC.

Better yet you can have a different bank account for each of these businesses and avoid the accounting nightmare of having all the money flow in one account.

Marketing

A DBA helps you better target your audience by using a name that resonates with them. You can change the name anytime without having to go through the complex renaming process of an LLC.

What are the disadvantages of a DBA?

Does not offer limited liability protection

On its own, a DBA cannot protect the business owner from personal liability if the business is facing problems. In other words, there is no distinction between the business assets and your personal assets. If the business gets sued or goes into debt, you could lose your personal assets as payment.

For example if you own a dog walking business under a DBA, your personal assets could be in trouble if you get sued. If you don't want to be held personally liable for any lawsuits and company debts, you'd have to form a corporate structure which offer liability protection.

If you are running a DBA under an LLC, this shouldn’t be a problem because, by default, the LLC is a separate legal entity from you. However, it’s still a problem because any issues with your DBA will be automatically transferred to your LLC. In contrast, if you are running two LLCs, each LLC is different from the other one.

It’s not a legal business entity

A business can exist as a DBA unless it is first registered as one of the recognized business structures.

You don’t have exclusive rights to your DBA name

You don’t own the name that you choose to do business as. Someone else can give their business the same name. In contrast, you can’t have two LLCs with the same name operating in the same state.

What are the pros of a Limited Liability Company?

Let's review some of the pros of an LLC.

Personal liability protection

An LLC is separate from its owner meaning you are not personally liable for any problem that your company faces and company's debts. Creditors cannot come after the owner's personal assets like cars, houses, and personal bank accounts if the company goes bankrupt.

Separate legal entity

If you have two businesses and you file them as different LLCs these two businesses are separate legal entities even if they are owned by the same person. Anything that happens in one business will not affect the other businesses. That's why it is critical to have a separate bank account for your legal entity. Read more about how to open a bank account for LLC.

In contrast, if you are running the businesses as DBAs, they are different businesses but they are under the same legal structure. Therefore, anything that happens in the DBA also affects the main LLC.

See our review of the best business accounts for LLCs.

Multiple taxation options

There are many tax advantages of an LLC vs DBA. By default, LLCs are taxed either as a sole proprietorship or as a partnership depending on the number of members. This rule applies to any DBA that’s formed under an LLC.

However, there is a major difference. The LLC can also opt to be taxed either as a C corporation or as an S corporation. This won’t mean much when you are starting out but as the business grows and your income increases it may reach a point where being taxed as a corporation helps reduce your tax liability.

Exclusive rights to the business name

One of the first steps to filing an LLC is choosing a unique name for your business. Once the business is registered under that name, no other business can conduct business in your state using the said name.

Credibility

Running your business as an LLC gives you more credibility in front of potential customers. It will also help you conduct business with high-value clients like government organizations that may have otherwise overlooked you if you were a sole proprietor or partnership. Read more about the differences between a sole proprietorship vs LLC.

Note, if you are running a DBA under your LLC the credibility still stands. It only becomes an issue if you are running a sole proprietorship or partnership as a DBA.

What are the cons of an LLC?

Here are some cons of an LLC.

A more demanding formation process

I wouldn’t call the formation process of an LLC complex but still, it involves more steps than DBA formation. For instance, you need to have a registered agent who will receive official documents for your LLC and this means additional startup costs.

Multiple compliance requirements

Depending on the state there are set regulations you need to follow so that your LLC remains compliant. One of them is filing an annual report that includes every business activity that your business has engaged in during the year. You also have to hold an annual general meeting with the company members and record the minutes.

Lastly, you need to have an operating agreement that outlines each member's stake in the business and their responsibilities.

Which is better for taxes, LLC or DBA

There are no separate taxation rules for DBAs. Instead, you are taxed based on the business entity that the DBA is running under.

For instance, if you are an LLC running a DBA then all income from the DBA is passed through to your individual tax return and subjected to individual tax rates.

The only difference is that as an LLC, you may opt to be taxed as a corporation which could translate to a reduced tax burden.

Also depending on the state of formation, LLCs may benefit from tax breaks such as no income tax, no sales tax, and no corporate tax.

But, that’s a whole different topic that we discuss in our article on the best states to form an LLC.

Spoiler, registering your business in a different state doesn’t really help you pay less tax unless you live in the said state.

If you are looking to get some tax breaks for your business then you should explore some other options like tax write-offs.

It’s a simple trick that smart entrepreneurs use to reduce their tax liability. It doesn’t matter if the business is operating as an LLC or as a DBA.

Unfortunately, a lot of business owners are not aware of the expenses they are allowed to deduct and consequently end up paying more taxes than they should. The good news is there are dedicated software solutions that help track these expenses and automatically deduct them to reduce your tax debt.

Bonsai tax is one such software.

Bonsai Tax: How we can help

Our software integrates with your business bank account and credit cards and tracks all your business transactions to easily identify deductible expenses. It then writes off these expenses and goes a step further to help calculate your quarterly tax debt.

Among some of its useful features is the receipt scanner to ensure that expenses paid in cash are also tracked and deducted from your business income.

Bonsai also comes with other extra features such as an invoicing system that supports automatic payment requests, payment reminders, and the option to add penalties for late payments.

You can try the software for 14 days at no cost.

Conclusion

Hopefully, this article on DBA vs LLC has given you all the information you need to decide when to file your business as an LLC and when to file as a DBA. Still, this is not a topic we can exhaust. To get specific advice on your unique business needs we recommend you talk to an attorney or law firm that specializes in business law.

Tom Smery
Tom Smery is a certified CPA for over a decade. In his free time, he writes articles to pass on his expert knowledge on taxes and accounting. Thomas has a wide range of deep knowledge on 1099 taxes, and finance topics. You can find him fishing when he is not preparing taxes for his clients or writing about accounting.

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