The first major decision you must make as a small business owner is the type of company you want to form. Two popular options among small business owners include using a “doing business as” (DBA) name or forming a limited liability company (LLC).

While both DBA names and LLCs require registration with the state and allow you to conduct business using a new name, only the LLC structure allows you to protect your assets from business liability.

This guide discusses why forming an LLC is the best option for most small business owners.

DBA vs. LLC: Key Differences

An LLC is a fully recognized, independent legal entity whereas a DBA name is a fictitious business name that a sole proprietor or partnership can use to brand their business.

An LLC protects its members from the company’s liabilities while using a DBA name offers no such protection because it’s just a business nickname.

An LLC also is eligible for an Employer Identification Number (EIN) and can choose its tax designation from among several options. In contrast, a business that uses a DBA name has no tax benefits and the owners must report its profits on their individual income tax returns.

What is a DBA?

A company is said to be “doing business as” when its business operating name is different from its registered name. This mostly applies to sole proprietors and partnerships. When starting either of those two business structures, you have to choose between a bespoke business name or a DBA name.

Registering a DBA name doesn’t form a different legal entity. The owner isn’t bound by limited liability, and the business assets won’t have protection. If the company runs into losses, you’ll be expected to handle them.

A DBA name simply allows small businesses to run like formal business entities without having to form an LLC. A company can open a bank account and receive payments under its DBA name.

What is an LLC?

An LLC is a business that operates as a different legal entity from its owners. The company has members and managers. Members are the owners of the business while the manager runs its daily operations. Managers can either be members or not.

Because LLCs are independent legal entities, the owners must complete multiple steps and meet more requirements to form one. The members also have to conduct business under the LLC’s legal name.

The main goal of forming an LLC is to protect the owners’ assets from business liabilities. As an LLC owner, your personal assets won’t be at risk if the company incurs any losses because there’s a clear distinction between the two.

DBA vs. LLC: Advantages and Disadvantages

Here are the main advantages and disadvantages of using a DBA name and forming an LLC.

Advantages of a DBA

Using a DBA name to conduct business provides three key benefits: more flexibility, personal privacy, and limited legal requirements.

Flexibility

A DBA name gives business owners a lot of flexibility to play around with their business brand. This makes the business more receptive to changes in circumstances.

Personal Privacy

DBA names help to cushion the owners from having their names publicly associated with their businesses. While you certainly have strong ties to your business, you have to separate it from your personal life at some point.A DBA name enables you to do this.

Limited Legal Requirements

There’s no limit to how many DBA names a company can register. Because DBA names are so common, it’s fairly easy to set one up. Many states even allow you to do so online. The legal requirements are minimal and, while they vary by state, you can usually have a DBA name within a few days.

Disadvantages of a DBA

Using a DBA name for your business does, however, come with several drawbacks.

Tax Limitations

A DBA name allows you to run your business under a different name. But, you’re not allowed to use terms like “LLC” or “Corporation” in a DBA name because the essential rules governing sole proprietorships and partnerships still apply.

No Rights to the Name

A DBA name isn’t a trademark. This is why there are few legal requirements to register one.

State Restrictions

All states have their specific requirements for filing for a DBA name. This limits the flexibility of using a DBA name because it can only apply in the state where you do business.

No Liability Protection

A DBA name gives your business a fictitious name but doesn’t protect you from any liability. If your company is a sole proprietorship, you’ll be forever tied to its liabilities regardless of how many DBA names you register.

Advantages of an LLC

Forming an LLC also provides three key benefits: “pass-through” taxation, limited liability protection, and a flexible management structure.

“Pass-Through” Taxation

The Internal Revenue Service (IRS) views income from the business as your income. That means the IRS will tax this income just like it would if you worked for any other company.

Limited Liability Protection

As the name LLC implies, members have limited liability protection from debts incurred by the company. In simple terms, the LLC and its members are different entities. If the firm runs into losses, the personal assets of the members are protected and can’t be liquidated.

Flexible Management Structure

There are no restrictions on how owners can choose to manage an LLC. The members can opt for a member-managed or manager-managed LLC format.

Disadvantages of an LLC

As with any business structure, LLCs have a few disadvantages.

Strict Regulations

Because LLCs are independent entities, the government has a host of regulations that dictate how you can form and operate them. Due to the liability protection they receive, LLCs can’t engage in certain business activities (e.g., they can’t legally operate as banks, insurance companies, or medical service companies).

Difficulty Securing Investors

Investors typically avoid funding LLCs because the IRS taxes LLCs as a partnership (with “pass-through” taxation) and that’ll complicate an investor’s personal tax situation.

Read our LLC guide for a more detailed explanation of an LLC’s advantages and disadvantages.

Can You Create a DBA for Your LLC?

If you already formed an LLC, you can still register a DBA name with the state if you don’t want the company to operate under its own name. LLCs will often register new DBA names when they want to sell products or services under a separate business name without creating a new LLC for each business.