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If you are thinking about starting a business, choosing the business structure you’ll use is one of the most important initial steps. In many cases prospective business owners want to know “What’s the difference between a DBA and an LLC?”. There are quite a few differences between operating informally using a DBA vs. taking the steps to legally form an LLC. In this article we’ll go over the basics of what a DBA is, what an LLC is and the key differences between the 2. With this information, you’ll be able to make a more informed choice of what will work best for you and the next steps to take to get your DBA or form your LLC.Table of Contents:
What is a DBA?
The term DBA is an acronym for “Doing Business As”. Depending on the area where you are you may also hear this type of filing referred to as a fictitious name, assumed name or trade name. All of these names refer to the same type of filing. A DBA name is a filing that allows a business to operate under a name that is different from it’s legal name.
DBA names can be used by all types of businesses but are generally the most beneficial for those operating under an informal business structure like a sole proprietorship or partnership. If you operate as a sole proprietor or partnership, the legal name of your business is your name or must include your name. Because of this limitation, informal businesses have less credibility and ability to brand their business. A DBA allows informal businesses to use a name that does include their personal name.DBA Name Example:
Let’s take an example of Jacky Johnson. She is starting a nail and beauty salon and isn’t planning to form an LLC or Corporation, so by default she is a sole proprietor. She wants to name her business “Lux Nail and Beauty Salon”. Since this doesn’t include her name, she’ll need to file a DBA name. This will allow her to operate her business under her desired name. In addition the DBA provide extra credibility as her business looks more serious than just a person with a hobby. Getting her DBA also allows her to open a business bank account under her business name.
Looking for more in-depth information on DBA Names? Check out our detailed guide: What is a DBA?
What is an LLC?
The term LLC is an acronym for “Limited Liability Company”. An LLC is newer type of formal business structure that is established at the state level in the United States. LLC’s provide a mixture of features from informal businesses like the default pass-through taxation that sole proprietors and partnerships have as well as personal liability protection that corporations offer. Because of the mixture of advantages LLCs provide, they have become an increasingly popular business structure chosen by small businesses across the U.S.
Since LLCs are a formal business structure, they are recognized as legally distinct from their members (owners of an LLC are referred to as members). This distinction can be very helpful in limiting their members personal liability risk. The limited liability afforded to LLC members helps protect member from being held personally accountable for business debts or in cases when the business is sued.
Looking for more in-depth information on LLCs? Check out our detailed guide: What is an LLC?
Key Differences: DBA vs LLC
When evaluating the choice between operating using a DBA vs an LLC it’s important to highlight that a DBA is not a legal business structure. While a DBA can provide benefits it does not provide legal distinction between the business and its owner. Even with a DBA filing, your business will still be recognized under the law by its legal name and structure.
If you file a DBA you have not established a separate legal entity from yourself or your business partners. So if you are the sole owner of your business but haven’t formed an LLC or Corporation, you are a sole proprietor and if there are 2 or more owners you are a partnership. If you’d like your business to be a separate entity from yourself and/or your business partners you’d need to establish an LLC or Corporation. With that out of the way, lets go over the 3 main differences between using a DBA name as a sole proprietor or partnership vs forming your business as an LLC:
- Personal Liability Protection: The big difference is personal liability protection. If you set up a DBA to do business under a different name, you’re not creating a separate legal entity for yourself. You’re not granting yourself any liability protection. All you’re doing is superficially changing the name under which you formally operate. Think of it as a mostly cosmetic change.
- Taxation Status and Flexibility: Similarly, setting up a DBA isn’t going to change the way you’re taxed. If you run a sole proprietorship, it doesn’t matter what name you’re using; you’re still going to pay taxes as a sole proprietor. If you run an LLC, it doesn’t matter whether you have a DBA in place or not; you’ll still pay taxes as an LLC.
- Costs for Startup and Maintenance: DBAs and LLCs are both managed at the state level. To set up either one, you’ll typically have to pay a fee. You may also have to pay an annual renewal fee/tax to maintain your DBA or LLC status. However, the costs for startup and maintenance will typically vary between a DBA and LLC. These costs and rules vary significantly from state to state, so it’s difficult to make a generalization here.
Are you ready to get started? If so, check out our how-to guides on DBAs and LLCs:
- How to Get a DBA: A Step-by-Step Guide to Filing a DBA Name
- How to Start an LLC: A Step-by-Step Guide to Forming an LLC
Important Considerations: DBA vs LLC
It’s important to remember that DBAs and LLCs are entirely different concepts, even though they bear some similarities.Remember:
- Both LLCs and DBAs can give your business a different name. Both of these creations allow your business to create a different name for itself.
- Only LLCs grant liability protection. DBAs won’t grant you any form of legal independence or liability protection.
- LLCs have the option to create a DBA. Any LLC can start a DBA; it’s not just for sole proprietorships and partnerships.
- Creating a DBA doesn’t make you an LLC. Creating a DBA may give your business a more professional-sounding name, but it won’t give you LLC status.