When an entrepreneur decides it is time to start a new business, exploring the various business structures available is usually the first step taken. Unfortunately, most discover there is much confusion related to the differences in the DBA vs. LLC option.
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:
- DBA is an acronym for Doing Business As
- 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 a 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
A limited liability company, or LLC, means that a business is operating as a distinct and separate legal entity from its 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 business owners to use a name other than their legal name to operate their business. Filing for a fictitious name can be beneficial to the business as it may help in the development of a recognizable brand presence with a descriptive and creative business name.
A DBA also allows the business owner to open a business bank account and receive payments in the name of the business, without the need to incorporate or form an Limited Liability Company (LLC).
How is an LLC Similar to a DBA?
Both LLCs and DBAs allow business owners to name their business something other than their own legal name. Both structures also allow owners to perform banking under their business’ name instead of their personal 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. 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 LLC for a DBA?
An LLC can benefit from the ease of DBA filing when the company wants to expand into new products or services. 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.
Understand the differences between an LLC and a DBA, and how to decide when a DBA makes the most sense.
Holly Magister, CPA, CFP
Holly also founded ExitPromise.com and to date has answered more than 2,000 questions asked by business owners about starting, growing and selling a business.
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I run a summer basketball league. It’s run one month out of the year. It brings in $15,000 and bills are about $10,000. I’d like to start a DBA to collect fees and pay bills. That’s about all I need it for. Would I be taxed on the small profit any differently if I filed an LLC? Based on the amount and only needing it one month each year had me leaning towards DBA account.
I want to register a sign language business where I’ll be teaching classes at nearby locations. The locations will have liability insurance. My husband is military so we may have to move and I’ll want to have the business in other areas.
What is the basic, most simple, business structure? I was going to do sole proprietorship and DBA but, considering LLC.
Do I need additional general liability insurance? If yes, do you recommend doing a DBA and added insurance or doing an LLC which is insured?
I have a small business where I make and sell furniture and home decor. I rent a space in a vendor marketplace and pay a monthly rent. I want to be able to claim my rent, supplies, tools, and home “office space” on my income taxes. Do I need to file for an LLC to do this? Thank you
Hi Diane,
It is not necessary for you to form a business entity of any kind (LLC, Corporation, Partnership) to be able to take ordinary business expenses as a deduction against your business income.
When you are a sole proprietor (or a Single Member in an LLC), the income and business expenses from your business operation are reported on the Federal Form 1040 Schedule C.
All the best…
Good Afternoon,
My wife would like to create a company for her crafts/ apparel. However, we are trying to figure out which route would be the best for us. If we create a DBA and things work out to where we want to expand. Is it possible to create an LLC and transfer the DBA to the newly created LLC? Or are we completely overthinking this and a DBA would be sufficient enough for our needs?
Thank you for all your guidance.
Roger B.
Hi Roger,
You are not overthinking this decision at all.
Whether a DBA (which is not a separate business entity) is appropriate for you and your family depends on many factors. Here’s another post which may be helpful to you about the various types of business entities.
If you do choose to start out with a sole proprietorship and file for a fictitious name, it is possible to take these personal assets you’ve developed and transfer them into an LLC.
Technically, the business your wife starts as a sole proprietor and its intellectual property will belong to her. If she subsequently forms an LLC, she would transfer these assets by contributing them to the LLC at startup.
The DBA may need to be terminated by her first and then a separate application be made by the LLC to accomplish the transfer properly.
Does this help Roger?
My partner is a truck driver, an owner operator, and he has a DBA for his company name that he drives under. Would it be beneficial for us to obtain an LLC? How would it help us, other than protecting personal assets from litigation?
Hi Charity,
Without doubt, the most compelling reason to form a business entity (such as an LLC or corporation) is to obtain certain personal asset protection and to reduce personal liabilities exposure.
Another benefit may be that it’s easier to obtain general liability and other forms of insurance for the business.
There are also potential tax savings if the LLC elects to be taxed for federal purposed as a corporation or s corp.
To determine if such a tax election is right for your situation, it takes careful consideration of many factors. One such factor is how much income your operating business produces each year.
Again, there are many factors to consider so I am sorry to say there is no ‘one-size fits all’ best way to elect a tax structure when forming an LLC.
All the best..
If you have multiple DBA’s under one LLC, can each DBA have a different ‘pass through’ income rate for the members of the LLC?
For example, ABC LLC has 2 members (John & Steve) and 3 DBA’s.
With DBA 1 – John shares 50% profits/loses & Steve 50%
With DBA 2 – John shares 80% profits/loses & Steve 20%
With DBA 3 – John shares 30% profits/loses & Steve 70%
If this can be done, would you just outline the details in your articles of organization or operating agreement?