When navigating the intricacies of small business ownership, you’ll likely encounter the terms “DBA” and “LLC”—both of which relate to the way your business is structured. It’s crucial to grasp their unique purposes, differences, and similarities. This article explores DBAs and LLCs, including their definitions, main characteristics, and scenarios where choosing one, the other, or both could be beneficial.
What is a DBA?
A DBA, which stands for “doing business as,” lets your business operate with a name other than the one it’s officially registered under. A DBA is also known as a fictitious business name, a trade name, or an assumed business name.
Sole proprietorships and partnerships commonly use DBAs if the owners don’t want to operate publicly under their official legal names. DBAs are also available to LLCs and full-fledged corporations.
For example, Jane Doe runs a dog-walking business as a sole proprietor. Her business is therefore legally named “Jane Doe” because a sole proprietor is not a separate legal entity from the business. However, if Jane wants to call her business “Canine Excursions,” she might register that name as a DBA.
A DBA lets a business like Jane’s establish a distinct brand identity without needing to close down its established business and create a new, formal legal entity. In the eyes of the law, the original business and the business operating under a DBA are the same.
Registering a DBA with the state where you operate allows the state to track your business income for tax purposes, no matter what name appears on the checks. This alignment with tax authorities’ expectations helps avoid financial complications.
What is an LLC?
A limited liability company (LLC) is a legal structure that provides its owners with liability protection—unlike a sole proprietorship. An LLC is a separate business entity that’s entirely distinct from its owners, ensuring that the LLC owners’ personal assets are shielded from the company’s debts and liabilities.
LLC owners, known as members, enjoy the flexibility of a more relaxed organizational structure than corporations. An LLC can choose to be taxed as a pass-through entity, meaning profits and losses are reported on the members’ personal tax returns, and the LLC members pay a single round of income tax on profits. Corporations, meanwhile, pay taxes on income at the corporate level, while the owners also pay taxes on any income they receive from the business. This is often referred to as double taxation, and LLCs can help their members avoid it.
The LLC’s flexibility, combined with legal protection for members, makes it an attractive choice for many small businesses. Note that an LLC must register with the secretary of state’s office in the state in which it operates. Without registration, the business defaults to a partnership, lacking the LLC’s liability protections.
📖Learn more: How To Start an LLC in 6 Easy Steps
DBA vs. LLC: Key differences
Both a DBA and an LLC let you run businesses using names different from your own, but that’s roughly where the similarities end.
Here’s how they differ:
- Ease of setup. Registering a DBA is relatively straightforward for an existing business. Although you have to file paperwork and pay registration fees for both a DBA and an LLC, a DBA generally requires only a one-time fee (with possible periodic renewals) and much less paperwork. Setting up an LLC requires more effort, including comprehensive business formation paperwork, an appropriate filing fee, and adhering to annual reporting requirements, depending on your location.
- Naming rights. Neither an LLC nor a DBA gives your chosen business name the same level of protection you’d get with a trademark, but an LLC does offer some naming-rights benefits. In most states, registering your LLC ensures no other local business entity can use the same name. A DBA typically doesn’t offer exclusive rights to a name.
- Liability shield. While an LLC limits members’ personal liability for business obligations, a DBA includes no such liability protection.
- Tax obligations. Registering your sole proprietorship as a DBA does not change your company’s tax requirements; you’ll be subject to the same tax obligations either way. Forming an LLC may also result in being taxed like a sole proprietorship (common for single-member LLCs). However, you can still opt to be taxed as a C corporation or an S corporation if, say, you wanted to take on outside investors.
When should you use a DBA or an LLC?
You can often use a DBA and an LLC in conjunction. It's important to consider the distinct implications of each when determining what best suits your business.
When to use a DBA
When deciding whether to adopt a DBA, consider if your existing business structure would benefit. A DBA is a straightforward and cost-effective option for sole proprietors who want to operate under a different name than their legal name. If you run an existing LLC, partnership, or corporation looking to switch lines of business or expand geographically, a DBA can be a practical way to align your business name with an evolving strategy.
When to use an LLC
One critical consideration is determining how important liability limitation is to you. Forming an LLC may be a prudent choice if you have personal assets that need protection from potential business liabilities.
An LLC might also make sense if your business has multiple owners or you want a more formal structure than a partnership. Aside from offering more protection for members, it provides clearer guidelines for governance and operation and opportunities to formally distinguish different members’ roles. If you envision significant growth or plan to attract investors, the credibility and structure of an LLC may also be beneficial.
When to use both
In many cases, businesses choose to operate with both a DBA and an LLC. For instance, your business’s formal legal entity may be an LLC so you can enjoy personal liability protection and tax benefits. But your state may require that all LLCs include the words “limited liability company” or an approved abbreviation in its official business name. In this case, if you want to leave “LLC” off marketing materials or your website, you might adopt a DBA to conduct business under a less clunky, more marketable name.
DBA vs. LLC FAQ
Is it better to have a DBA or an LLC?
Choosing a business name under a DBA is suitable for simple changes without altering the company structure, and it’s ideal for conducting business in a sole proprietorship. An LLC, meanwhile, offers protection of personal assets with pass-through tax benefits—and you can still use a DBA if you want to operate under a different business name.
Why would an LLC use a DBA?
An LLC may register a DBA to adapt to changes such as new business offerings or expanding geographic markets. For example, it may rename itself from “LA Threads-on-Demand LLC” to “California Threads-on-Demand” to represent growth beyond Los Angeles or to remove “LLC” from the name for marketing and advertising.
How do you start an LLC?
When starting an LLC, you must choose a unique business name, file formation documents, outline your LLC’s structure including business profits distribution in an operating agreement, obtain an employer identification number (EIN) from the IRS if you hire staff, and fulfill state-specific requirements like appointing a registered agent and securing business licenses.
Can you change a DBA to an LLC?
Yes. Transitioning from a DBA to an LLC involves registering the LLC using your DBA as the new entity’s legal business name, creating a new and distinct entity.
