Differences Between a DBA and an LLC
It's important to note that a DBA is NOT a business structure. A DBA is just a name for a business. An LLC is a business entity like a corporation or general partnership. A business entity can have a DBA.
Many people confuse DBAs with sole proprietorships. A sole proprietorship is the simplest business structure--the owner pays personal income tax on the company's profits as well as a self-employment tax. Because sole proprietors operate under their own names, they often elect to file for a DBA name. These two terms do not mean the same thing.
There are key differences you need to understand as you consider converting your business (and therefore, your DBA) into an LLC:
- Startup Process: While the process of registering a DBA varies from state to state, it’s generally much simpler — and less expensive — than forming an LLC. This means less paperwork and fewer restrictions.
- Costs: Registering a DBA typically costs between $10 and $100 compared to a range of $100 to $800 to form an LLC. Maintaining a DBA also typically costs less than maintaining an LLC. While it varies by state, DBAs must sometimes pay a renewal fee while LLCs often need to file annual reports and other paperwork that sometimes includes a fee as well as certain taxes.
- Liability: One of the most significant differences between a DBA and an LLC is the liability protection an LLC provides. With a DBA, there’s no legal separation between the business’ activities and the business owner. This means owners of DBAs could be held personally liable in the event of a lawsuit, putting their personal finances at risk. LLCs offer a layer of liability protection, shielding business owners from potential damages.
- Flexibility: With its relatively simple and affordable registration process, a DBA gives business owners the flexibility to operate the business under different names. This could be useful if you decide to switch the focus of your business or expand into a new area. It’s more complicated and expensive to make such changes with an LLC because you need to form a new legal entity.
- Taxation: The process for taxing an LLC depends on how the owners elect to classify the company (e.g., as a sole proprietorship, corporation, or partnership). Because a DBA is an extension of its owner — whether that’s an individual or even an LLC — their tax rate depends on the owner’s filing status.
Benefits of Changing a DBA to an LLC
The primary benefit of changing from a DBA to an LLC is the liability protection LLCs offer. As a DBA, your personal finances (e.g., bank accounts, automobiles, real estate) could be at risk if your business incurs debt or must pay damages stemming from a lawsuit — even if you have separate personal and business accounts. An LLC legally separates the business from the owner and protects personal assets.
LLCs also provide more privacy than a DBA, allowing owners to more easily keep their identity secret if they choose to do so.
Another benefit of an LLC structure is that it can make your business look more professional and credible, potentially helping you gain clients or drive sales. Additionally, if you need to raise capital or decide to sell your business, it’s much easier to do both as an LLC than as a DBA.
Steps to Changing Your DBA to an LLC
While changing your business from a DBA to an LLC isn’t an overly complicated process, it’s important to follow the correct steps. Here are the key steps you should take to ensure a successful transition:
1. Determine If You Can Use Your DBA Name
States require LLCs to have a name that no other registered business uses. You can use a business name search tool online to determine if your existing name is available. Assuming your existing business name meets all of your state’s other requirements for an LLC, you also need to convert or cancel your DBA registration before filing Articles of Organization for your new LLC.
2. Choose a Registered Agent
A registered agent is an individual or business entity responsible for receiving important legal documents on behalf of your business. A member of your LLC may act as a registered agent or you can hire a professional service to fill this role. While hiring an outside company to serve as your registered agent incurs an additional expense, it offers several advantages from increased privacy and convenience to peace of mind.
3. Register Your New LLC With the State
While the LLC registration process varies from state to state, typically you must complete and file the Articles of Organization (or a similarly named document) and pay a filing fee. Depending on the state, you can complete this process online or by mail.
4. Obtain an EIN
The U.S. government uses an employer identification number (EIN) to identify your business. You need it to file taxes, open a bank account, and hire employees. You can obtain an EIN from the Internal Revenue Service for free, either online or by mail.
5. Open a New Bank Account
To ensure you enjoy the liability protection provided by an LLC, you need to open an entirely new bank account for your new business. You could face financial risk if you continue using an account you previously opened for your DBA. You’ll also want to ensure you make the necessary changes to any vendor accounts, business credit cards, etc.
6. Dissolve Your DBA
You must also properly dissolve your DBA with the state or local government with which you originally registered. This process varies by location so check in with your business registration authority.
7. Make Other Final Changes
Once you complete the transition to an LLC, be sure to update your company website, business listings, letterhead, business cards, social media channels, and any other place that may contain outdated information about your business.
Converting from a DBA to an LLC is a huge step for your business, but it doesn’t need to be complicated or difficult. While some of the registration details will vary depending on your state, the general process is fairly standard. By following this guide, along with the official instructions from your state’s business registration office, you can ensure a smooth transition.