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Once you’ve decided to start a new business, exploring the various business structures available is usually your first step. Unfortunately, for many there is a great deal of confusion regarding the differences between the DBA vs. LLC business.
One of the most common questions we are asked as advisors to business owners is “what is the difference between a DBA and an LLC?”
The short answer is “an awful lot!”
The long answer to the DBA vs LLC question is spelled out here and will hopefully serve as a guide when making the important decision about the business entity structure for your new business.
This post will cover:
- What does DBA stand for?
- LLC is an acronym for Limited Liability Company
- The Differences in business income taxation between a DBA and an LLC
- Why use a DBA
- Similarities and Differences when considering the DBA vs LLC
DBA Definition
DBA is simply an acronym for “doing business as.” It is sometimes referred to as a trade name, fictitious business name, or assumed business name.
A DBA allows an individual or business to operate under a name that is different from its legal name. For example, if John Smith wants to operate his cleaning business as ABC Cleaning, he will need to file for a DBA. In most states, DBAs are filed at the county level where the business is located.
LLC Definition
Having a limited liability company established, or LLC, means that a business is operating as a distinct and separate legal entity from its individual owners. While LLCs require more formalities than a DBA, they have fewer restrictions than corporations.
An LLC must be managed by members or a manager. Members are the owners of the company, while a manager, may or may not be a member. The LLC structure also includes more tax flexibility, as the LLC can choose to be taxed as a sole proprietor, partnership, or corporation.
To form an LLC, business owners must file articles of organization at the state level and adopt a Member(s) Operating Agreement.
What does a DBA Intend to Accomplish for a Business Owner?
Filing a DBA allows a business owner to use a name other than their legal name to operate their business. An individual who files for a DBA to operate their business is operating their business as a sole proprietor — not as a business entity. The business, and all of its assets and liabilities, belong to the individual who files for the DBA.
Filing for a fictitious name can be beneficial to a business entity is possible as well. When this is done, typically it’s for the purpose of developing a separate and recognizable brand from the official name of the business entity.
When a DBA is filed for by either an individual or a business entity, it allows the individual or business owner to open a business bank account in the fictitious name so payments may be made payable to the fictitious name of the business.
How is an LLC Similar to a DBA?
Both LLCs and DBAs allow business owners to name their business something other than their own individual or business’ legal name.
How is an LLC Unlike a DBA?
The biggest difference between a DBA and an LLC is liability protection.
Under a DBA, there is no distinction between the business owner and the business. The business owner is liable for all expenses incurred on behalf of the business. On the other hand, an LLC provides limited liability protection. The business owners’ personal property remains completely separate from the business.
In addition, a DBA does not provide any tax benefits. As an LLC, owners can choose a corporate structure such as an S-corporation that receives special tax treatment.
And last, but not least, in most states where you form an LLC, there is a requirement to file an annual report and in certain circumstances pay an annual fee. Whereas, fictitious name certifications, which provide you with the right to use a DBA, typically has a one-time filing and fee in most states.
Is it Ever Appropriate to Create an DBA for an LLC?
Yes, an LLC may benefit from the ease of DBA filing when the company wants to expand into new products or services.
For example, if John Smith’s cleaning company were ABC Cleaning, LLC and he decided he wanted to expand into selling cleaning supplies online, he could file a DBA for his new project “ABCCleaningSupplies.com” that would be protected under the original LLC.
A DBA allows an LLC to broaden its offerings without creating a new LLC or corporation for each division.
Are There Other Ways to Protect Your Business?
Yes, absolutely. If you intend to have additional brand names for your business, create a website with a name that differs from your official, legal name or create other intellectual property, there are other steps to consider taking.
We’ve got a post on this topic here where you may learn more.
I’m trying to open a single member LLC and it requires EIN. When applying for the EIN it says that a single member LLC will be considered as a disregarded entity. Why is this???
Tishya:
The IRS does not recognize LLCs, period. They are a creation of the states, not the federal government. Therefore, an LLC must be one of the federally-recognized business types, either a partnership (as long as there is more than one owner), a corporation, or what’s left—a sole proprietor. So a single member LLC cannot be a partnership, but it could elect to be treated as a corporation, but if not, the only option left is sole proprietorship.
Julie: I’m thinking “Tanks ‘n’ Trucks” is your new business name. If you read my responses to other queries like this, it falls into the category of “you COULD, but you probably SHOULDN’T”. If you fold a high-risk business like auto rentals inside the clothing business, you will have the exact opposite of “asset protection”. A DBA is NOT a separate business. It doesn’t protect your assets. It doesn’t protect you from tax exposure. But it IS easy to do and is cheap!
Some cheap advice: If you are starting an auto rental business and you don’t have any attorney or tax advisor representing you before you launch, you will be in a world of hurt faster than you can say “sold!” Any business that has high-cost assets (a car! or multiple cars!) in the hands of its customers better be protected or you will be getting an expensive education in short order.
Just because you have an existing Tax ID number (EIN), doesn’t give ANY value whatsoever to your business or provide any value in opening a new enterprise. EINs are worth exactly what you paid for them: nothing.
Thanks so much for the sage advice. I knew I was smarter than the average bear! Gotta protect my assets and sanity.
I will make sure I have legal and financial guidance through this new venture.