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.
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.
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.
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.
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.
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.
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.
Frequently Asked Questions
Is it better to have a DBA or LLC?
It all depends on your business goals. The main difference is that a DBA name is a fictitious business name for a sole proprietorship or partnership while an LLC is a formal legal entity recognized by the law. An LLC also gives you protection from the company’s liabilities, but costs more and has more requirements to set up.
Does a DBA protect you?
Using a DBA name won’t protect you from the company’s liabilities. It only gives your business a different name you can use to transact with and market its offerings.
Does a DBA pay taxes?
A DBA name isn’t a legal entity according to the law and thus doesn’t pay taxes. The IRS taxes sole proprietorships and partnerships that use DBA names through the individual tax returns of their owners. A DBA name doesn’t require a separate EIN.
Can someone take your DBA name?
It depends on the state. Some don’t guarantee exclusive use of the name, meaning anyone can use it if they want. Because a DBA name isn’t a company’s official business name, there are no name searches conducted to ensure no one else currently uses a specific name.
How can I add a DBA to an LLC?
The process of adding a DBA name to an LLC can vary slightly from state to state. Check out our state DBA guides to find the information relevant to your business.
Information on this page has been gathered by a multitude of sources and was most recently updated on December 2021.
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