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The complete guide to understanding DBAs vs. LLCs

The complete guide to understanding DBAs vs.  LLCs

Disclosure: This content is reader-supported, which means that if you click on any of our links, we may earn a commission.

Entrepreneurs starting a new business have many options to consider. Many people have trouble deciding whether to start an LLC, register a DBA, or do both.

This expansive guide covers everything you need to know about DBAs and LLCs so you can decide which one is best for your business.

Why it is so important to understand the difference between DBA and LLC

DBAs and LLCs are very different from each other. It is crucial that you understand how DBAs work and LLCs work so that you can decide which one is right for your unique scenario.

There are times when DBAs make the most sense for companies and other times when LLCs are the clear choice. Some of you may fall into a category where you need an LLC and a DBA.

Once you have trained yourself and strengthened the best solution, you can rest assured that your business is set up the way you want it. You have a clear understanding of your obligations and compliance requirements to ensure that your business remains in good standing with the state.

What is a DBA?

DBA stands for “doing business as.” The terms “trade name”, “fictitious name” and “assumed name” are all synonymous with DBA names. Certain states and jurisdictions may formally use different terminology, but it is the same.

A DBA is not a legal business entity. It is simply a name that can be used for business purposes.

Sole proprietorships, partnerships, LLCs and companies are all potential candidates to register a DBA name.

Let us e.g. Say you are an independent contractor offering web design services. You do not have a legal business entity, but you will register a company name for branding purposes to make yourself appear more professional to clients. Instead of using your own name, you can register a DBA name such as “Web Design Plus” or “Superior Design Services.”

Once you have registered a DBA, you can even apply for an EIN with the IRS using this name. You can use a DBA to open a checking account, apply for a credit card and even accept payments for checks written to that name.

Many entrepreneurs believe that by registering a DBA name, they are forming a business. But that is simply not the case. DBA names offer no liability protection or tax benefits.

What is an LLC?

LLC stands for “limited liability company.”

LLCs are legal business entities registered at the state level. When an LLC is formed, a new entity is established that is separate from the owner or owners.

As the name suggests, the biggest benefit of an LLC is liability protection. If the company is sued, goes bankrupt, owes money to lenders or is unable to pay creditors, the owners are not liable for any obligations or debts. So you can only lose up to the amount you have invested in the business and your personal assets will be protected.

Forming an LLC also gives you more freedom and flexibility in terms of taxation. We will discuss these options in more detail later.

LLCs require a little more work and effort to get started. They are more expensive to form and maintain than a DBA. But they are not subject to as many restrictions as other business entities, such as companies.

There are scenarios where it makes sense to form an LLC and register a DBA. Let us e.g. Say you open a new restaurant and decide to form an LLC called “Antonio’s Authentic Mexican Cuisine”.

After six months, you will start a food cart as an extension of the restaurant. But you do not want to form another LLC and you do not love your existing name for branding a food truck. You can register a DBA name as “Tony’s Taco Truck” and use it for the catering side of your business.

Quick tips to decide if a DBA or an LLC is right for you

Whether you are forming an LLC or registering a DBA, do not feel intimidated by the process. Instead of filling out the paperwork and archiving everything on your own, you can use an online service to handle all the work for you.

Platforms like LegalZoom make it easy for anyone to start an LLC or register a DBA.

For DBA registration, all you have to do is answer a few simple questions about yourself and the name you want to register. LegalZoom takes care of the rest. LegalZooms DBA registration service starts at only $ 99 plus government filing fee.

The LLC formation process is just as easy. The questions will be a little more in-depth, but you do not have to fill out any forms or submit papers on your own. LegalZoom sends the relevant forms directly to the appropriate government agency on your behalf.

You can also use LegalZoom for things like EINs, registered agent services, trademarks, patents, copyrights and other important business solutions.

If you are still torn and can not decide if a DBA or LLC is right for you, LegalZoom has a really cool tool on its site that you can take advantage of.

You will be reviewed a series of simple questions that can be answered in less than a few minutes. Based on your answers, LegalZoom gives you a recommendation for your needs.

Keep the following quick considerations in mind when deciding between a DBA and an LLC:

Tip # 1 – Liability protection

LLCs offer liability protection. DBAs do not.

So the first thing you need to do is decide if this is important to you. The answer will really depend on the type of business you have and your exposure to debt and liability.

Generally, it is in your best interest to go with an LLC to protect your personal assets. If your company has physical products, physical office space, or you plan to hire employees, you will definitely have the protection offered by an LLC.

For those of you who run an online service-based business and do not have business-related debt, you may be able to get away with remaining a sole proprietor and registering a DBA.

Just know that there will always be a risk associated with this and no one is immune to a lawsuit. Let us e.g. Say you offer online consulting services or nutrition coaching. One of your clients may sue you if they follow your diet or exercise program and end up being harmed as a result.

Tip # 2 – Formation process and advance fees

Registering a DBA name is about the easiest thing you can do. Although the exact requirements vary from state to state, it is usually just one form and you are ready to go.

You can usually get a DBA for less than $ 50 and that’s your only upfront price. If you use a DBA service like LegalZoom, expect to pay a setup assistance fee.

LLC formation is a little more involved. You must submit organizational articles to the state, create an operating agreement, obtain an EIN, obtain a registered agent, and comply with some unique state-specific mandates during the formation process.

Using an LLC formation service like LegalZoom will make your life a lot easier. They handle all the leg work on your behalf, which really simplifies the formation process.

LegalZoom’s LLC formation packages start at just $ 79 plus government fees. Upfront LLC state fees typically range from $ 50 to $ 500.

With LegalZoom you can get everything you need from a single provider.

Tip # 3 – Company name and branding

LLCs and DBAs actually give you both the benefit of having a company name that you can use for marketing and branding purposes.

You can even use the name of your DBA to open bank accounts and accept payments.

DBAs also work well for protecting confidential information, as you will not be forced to use your real name for business purposes. You can only operate under the DBA name.

The biggest difference between the LLC name and a DBA name is how that name is protected. In some states, registering a DBA name prevents other companies from using the same name. However, these protections are not offered nationwide. So you may need to register a trademark to ensure that no one else is using your DBA.

However, with an LLC, no other business entity in your state can register or use this name for business purposes or branding.

Long-term strategies for DBAs and LLCs

In addition to the quick tips mentioned above, there are some long-term considerations you need to keep in mind before making a decision.

You may not notice the results today or immediately after the decision is made. However, when looking beyond the initial steps and costs, the following factors should add some clarity to determine the best solution.

Strategy # 1 – Consider the tax implications of your decision

Whichever option you choose to go with, you pay taxes. It’s just part of shopping. But LLCs give you more tax options than DBAs. Here’s what you need to know:

If you are the sole owner registering a DBA, nothing changes in relation to your tax situation. All earnings from your DBA will still be reflected in your personal return and will be subject to ordinary income taxes and self-employment taxes.

Self-employment taxes are where individuals are hardest hit. This is because they have to pay 15.3% tax on all net business income before deductions.

By default, LLC income will automatically flow to members’ personal returns based on their share of ownership. But LLCs have the option of being taxed as a company, giving you more flexibility.

You can choose to be taxed by a C-corp and the company pays a fixed corporation tax rate of 21%. This avoids self-taxation as the IRS does not see LLCs taxed as C-corps as self-employed persons. On your personal tax return, you pay capital gains taxes on everything you receive from LLC. But this income is technically taxed twice – once for the company and again for your personal return.

LLCs that choose to be taxed as S companies have some more options. In this case, the company does not pay income tax itself. You only pay tax on what you pay as salary. This income is subject to self-taxation, but you can control how much you pay by giving yourself a reasonable salary.

In short, LLCs give you three different potential tax options to consider. DBAs offer no tax benefits.

Strategy # 2 – Review the ongoing requirements beyond the initial setup

DBAs are much easier to register than LLCs. We have already established that. But you should also look at what it takes to maintain your business after the initial formation process.

In many states, you can register a DBA once and not have to worry about doing much afterwards. There are no annual reports you need to file or the like.

Even the registration requirements are pretty lax. For example, DBAs in California must be renewed every five years. DBAs in Texas are good for ten years before a renewal is required.

The ongoing requirements for maintaining an LLC are a little more involved. Most states require an annual report, an annual fee, state taxes imposed on your LLC, and more. You must also store a registered agent with the state throughout your LLC. This is an additional cost to consider and a requirement for you to remain compatible.

Ultimately, LLCs require more paperwork and running costs to maintain compared to DBAs.

Next step

Once you have decided whether to start an LLC or register a DBA, you still need to come up with a good name. We have an in-depth guide to company names that can help you find a name that works well for your business.

You should also get an EIN. If this is the first time you are going through this process, you can see our step-by-step guide on how to get an EIN.

For those of you who are starting an LLC, you need to decide if it will be member managed or manager managed. This can be a tough decision if you are working with multiple partners. To help provide some clarity and guidance you can read our guide on members vs. managers in an LLC.

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