A DBA Is Not a Business Structure
A DBA isn't a type of business structure. A DBA is a fictitious name that can be used by sole proprietors, partnerships, LLCs, and corporations for branding purposes.
A common misconception held by first-time entrepreneurs is thinking that when they get a DBA, they are creating a formal business structure with liability protection.
But, this is not the case — they are essentially creating a sole proprietorship with a DBA name for branding and banking purposes.
A DBA isn't a business structure and won't protect your personal assets against lawsuits and/or creditors.
Visit our free LLC formation guides for simple instructions for forming your LLC and protecting your personal assets.Form An LLC
When you start a business, is it better to be a sole proprietorship (with a DBA) or to form an LLC?
To answer this question, you must consider three things:
- Naming and Branding
- Personal Liability Protection
Naming and Branding
When you start a business without a formal structure, you are essentially a sole proprietorship (or a partnership if there is more than one owner).
Sole proprietorships have the same name as their owners. For example, your business's name would be John Smith if your name is "John Smith." Partnerships take on the surnames of all of the owners.
This is obviously awkward for branding purposes, which is why sole proprietorships and partnerships get a DBA.
When you form an LLC, you can name your LLC the brand you want without getting a DBA.
Personal Liability Protection
Sole proprietorships and partnerships with a DBA aren't formal business structures and don't have any personal liability protection. Therefore, a business owner's personal assets (e.g., car, house, savings) are at risk if the business is sued.
LLCs are a formal business structure and do provide personal liability protection. Therefore, a business owner's personal assets (e.g., car, house, savings) are protected if the business is sued.
DBAs enable sole proprietorships and partnerships to accept and deposit checks made out in the business's name to any account associated with the DBA rather than the owner's name.
On the other hand, if you form an LLC and open a bank account under the LLC, you won't need a DBA and can accept checks made out to the LLC's name.
Quick Answer: DBA vs. LLC
When starting a business, it is usually better to choose a formal business structure like an LLC. You won't need a DBA for branding because you will use your LLC name, and you will have personal liability protection.
LLCs also offer increased business credibility and can help boost your business credit record.
Still Not Sure Which Business Structure to Choose?
Visit our guide for details on how to decide what business structure is right for your small business.
When You Should Get a DBA
There are two main reasons why businesses get a DBA:
1. The main reason to get a DBA is when your formal business structure, such as an LLC or corporation, has multiple brands or lines of business.
Example: Morning Bakery LLC decides to open up a coffee shop called Morning Coffee. At that point, they can open Morning Coffee and register a DBA for the name.
Visit our How to Name Your Business guide to learn more.
2. Informal businesses, like sole proprietors and partnerships, get a DBA for:
However, these informal businesses really should have organized as a formal business structure, usually as an LLC. This way, they will have all of the benefits above as well as personal asset protection.
Visit our What Is a DBA guide to learn more.
Advantages of an LLC
An LLC is a formal business structure that offers many advantages, such as:
- Personal asset protection
- Pass-through taxation
- Low cost
- Easy maintenance
- Can be taxed as an S corporation (S corp)
Personal Asset Protection
LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) will be protected in the event that your business is sued.
When you form your LLC, you can choose any business name as long as it is unique and meets state guidelines. When you form a sole proprietorship or partnership, you must use your surname unless you file for a DBA name.
You can learn more about tools for branding your business in our How to Name Your Business guide.
LLCs, like sole proprietorships and partnerships, are taxed as pass-through entities. This means that the business's profits will pass through to its members to be reported on their personal tax returns. All profits are only taxed once, at each member’s individual income tax rate.
The cost of forming an LLC is comparable to the cost of registering a DBA for a sole proprietorship or partnership. The benefit of personal liability protection often outweighs any additional costs.
LLCs are simple to maintain compared to other formal business structures. LLCs do not need to be renewed like a DBA.
Can Be Taxed as an S Corporation
LLC owners can choose to be taxed as an S corp. An S corp classification allows LLC owners to pay FICA taxes on only their "reasonable salary" and not on their full annual distribution amount. To learn if an S corp designation is right for your business, visit our LLC vs. S Corp guide.
How to Form an LLC
When you form your LLC, you will need to complete these steps:
- Name Your LLC
- Choose an LLC Registered Agent
- File Your LLC's Articles of Organization
- Create an LLC Operating Agreement
- Get an EIN
Step 1: Name Your LLC
You will need to provide your state with a unique name when you file your LLCs formation documents.
Step 2: Choose an LLC Registered Agent
Your LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Step 3: File Your LLC's Articles of Organization
The Articles of Organization, also known as a Certificate of Formation or a Certificate of Organization, is the document you will file to officially register an LLC with the state.
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
Step 5: Get an EIN
An Employer Identification Number (EIN) is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
DBA vs. LLC FAQ
Which is better for my business: LLC, Inc., or DBA?
If your business carries any risk or earns a profit, it is important to form a formal business entity like an LLC or corporation to protect your personal assets. A sole proprietorship with a DBA name will not offer personal liability protection.
Visit our business structure guide to find the best scenario for your business.
What is the best for taxes: LLC or DBA, for one owner?
Taxes for a sole proprietor with a DBA name are the same as taxes for an LLC with one owner. Both allow profit to pass-through to the owner's tax return. An LLC offers other tax options as well.
How important is it to get an LLC vs. DBA?
If your business carries any risk or earns a profit, it is very important to form an LLC to protect your personal assets.
What are the benefits of an LLC?
Some advantages of a limited liability company (LLC) include personal asset protection, reduced paperwork compared to corporations, tax flexibility, and increased credibility with customers and creditors.
How much does it cost to form an LLC?
The primary cost of forming an LLC is the state filing fee. This fee ranges from $40 to $500, depending on your state. You can read more details in our How Much Does it Cost to Form an LLC article.
What does a DBA allow you to do?
A DBA (doing business as) allows a business to operate under a name different from its legal name.
What is the benefit of a DBA?
A DBA allows sole proprietorships to operate under a name different from the owner’s legal name, which can make the company appear more professional. DBAs can also be useful when a company wants to introduce a new product or line of business under a different name but doesn’t want to create a new legal entity.
How do I get a DBA?
The DBA filing process differs from state to state. In some states, companies file for DBAs at the state level, while in other states, companies must file for DBAs with the cities or counties they operate in. To learn how to form a DBA in your state, check out these state-specific guides. You can also read our list of the best DBA filing services.