Is it Better to Form an LLC or a DBA?
Choosing a company structure is one of the most important decisions when starting a business. Two of the most popular options for small business owners include limited liability companies (LLCs) and “doing business as” companies (DBAs). Both offer pros and cons, so you should consider a number of factors before deciding which is best for your new business.
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DBA: The Simplest Form of Business
Simplicity is probably the biggest benefit of forming a DBA. It involves less paperwork, fewer rules and regulations, and lower upfront and ongoing costs than an LLC or corporation. DBAs are a popular choice for small business owners seeking a no-fuss startup process that minimizes expenses. While forming an LLC isn’t complicated or expensive, DBAs simply streamline the process.
Reasons to Have a Fictitious Name
Choosing a fictitious name for your business allows you to better brand and market your company, helping to attract more customers. For example, if you start a one-person consulting firm, you’ll probably have more success with a business name like “Sarah Smith Consulting” or “Top Choice Consulting” than you would by calling the business “Sarah Smith.” A fictitious business name makes your company sound more professional, trustworthy, and memorable to potential customers.
From a more practical standpoint, you also may need a fictitious name in order to open a business bank account or add your business listing to certain directories.
Differences Between an LLC and a DBA
While both are relatively simple to form, the differences between LLCs and DBAs greatly outweigh their similarities. Here’s an overview of the most significant differences:
Personal Liability
Personal liability is probably the most significant difference between DBAs and LLCs. With a DBA, there’s no legal separation between the business and the business owner. That means if the business incurs debt or must pay damages awarded in a lawsuit, the owner’s personal finances could be at risk.
An LLC provides a layer of legal protection between the business and its owners, keeping personal bank accounts and assets like cars or real estate out of harm’s way in the event the business faces financial trouble. This greatly reduces an owner’s risk level, especially as the business grows.
Entity vs. Assumed Name
An LLC has an entity name, which acts as a separate legal entity. An assumed (or fictitious) name, which is what a DBA effectively creates, is not a separate legal entity.
Registration Process
While the registration process for both LLCs and DBAs varies by state and is not overly complicated, it’s typically simpler to register a DBA. In fact, some states don’t even require you to register an assumed name for business use. Some states require DBA registration at the state level, but you often can register a DBA with the county or city in which it operates. This typically involves a short form and a relatively small registration fee.
In contrast, you must register LLCs at the state level — often with the secretary of state. This typically requires you to file a document called the Articles of Organization (or a similar name, such as Certificate of Formation) that outlines general information about your business. You’ll also need to pay a registration fee. LLCs also must have an appointed registered agent for the company. This can be a member of the LLC or you can hire a professional, third-party service.
Associated Fees
While fees also vary by state, they typically cost less for DBAs than for LLCs. The cost of registering a DBA, for example, usually ranges from $10 to $100 while registering an LLC can cost between $100 and $800. In addition to differences in registration and renewal fees, LLCs often must pay state taxes — which can greatly increase the cost of doing business.
Taxes
DBAs don’t receive any sort of tax advantages. Because a DBA isn’t a separate legal entity, its tax status is the same as its owner’s. Owners of LLCs, on the other hand, have several options for the taxation of their business by designating the company as a sole proprietorship, corporation, or partnership. This flexibility enables LLC owners to decide which tax status makes the most sense for their business.
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Securing a DBA for Your LLC
DBA structures aren’t just for individual business owners. In fact, an existing LLC can create its own DBA. One reason an LLC might decide to do that is if it wants to expand and offer a new service or focus on a particular demographic. A DBA would allow the LLC to create a separate brand for this business line. Doing so would combine the simplicity of forming a DBA with the personal liability protection and tax advantages of an LLC. It’s important to remember, however, that the LLC itself remains financially liable for the DBA.
Conclusion
So which is better, a DBA or an LLC? Ultimately, that depends on the unique characteristics of a business and its owners. LLCs offer more tax options and liability protection, but they also come with more paperwork and higher costs. Closely examine all possible options and speak with a third-party professional, such as an accountant or lawyer, to help ensure you pick the best structure for your new business.
