DBA vs. LLC: Understanding the Differences
By Milica Milenkovic
June 17, 2023
Whether you’re starting a new business or looking to reconstruct an existing company, it’s crucial to determine which business type best suits your current needs. For most entrepreneurs, the choice comes down to maintenance costs and the level of liability protection they need. While an LLC offers liability protection and other superior benefits, a DBA is generally less costly to maintain. Still, the DBA vs. LLC comparison is a complex matter, and these two differences are just the tip of the iceberg.
We’ve created this guide to help you understand how these two ways of conducting your business are different but also how they’re alike. Before we dive into discussing comparable features, here are in-depth definitions of both concepts:
What is a DBA?
A DBA or Doing Business As is also referred to as a fictitious business name, trade name, or assumed business name. It enables a business to operate under a name that differs from its legal name. For example, if a person called Alison Baker wants to operate her photography business as AB Photography, she’ll need to register a DBA. Of course, if she decides to use her legal name and go into business as “Alison Baker,” she won’t have to obtain a DBA certificate.
It’s a common misconception among first-time business owners that registering a DBA means formally creating a business structure with liability protection. The truth is that DBAs cannot be described as legal entities and don’t protect your personal assets against creditors and lawsuits.
Essentially, a DBA is an official registration of your business name that you can use to run the company. Partnerships and sole proprietorships commonly use fictitious business names as these company structures are not separate legal entities from their owners. Entrepreneurs who run these types of businesses usually register a DBA name for branding and banking purposes. In other words, a “doing business as” registration lets you change the name of your business with minimum formality while also allowing you to open a business bank account and collect payments under the assumed name.
Note that you can also register a DBA if you’ve previously formed an LLC and want your limited liability company to operate under a different name.
Most states let you apply for a DBA license in the county or city where the business is located. While registration requirements may vary based on your specific location, there are some general rules and restrictions that apply nationwide. For example, sole proprietors and partnerships aren’t allowed to use designations such as “LLC,” “Corporation,” “Inc.,” or any other labels that would imply the business is anything other than a DBA.
What is an LLC?
An LLC or a limited liability company is a business structure type that lets a company operate as a separate and distinct legal entity from its owners. In other words, an LLC can enter into agreements and own property, ensuring that the company’s dealings are kept separate from those of its owners.
While LLCs come with fewer restrictions than corporations, they require more formalities than DBAs. To form an LLC, business owners must file articles of organization with the secretary of state’s office, create an operating agreement, and appoint a registered agent. An LLC must be member-managed or manager-managed. A limited liability company’s members are the owners of the business, while a manager isn’t required to be a member.
In addition to personal liability protection, another feature that made it to the top of the list of LLC advantages is tax flexibility. Unlike C corporations, an LLC is not a separate tax entity. Instead, it’s known as a “passed-through entity” where all profits and losses go through its members, who simply include this information on their personal tax returns.
If you decide to form this type of business structure, you’ll be required to use your LLC’s legal name in all your affairs. These include filing government forms, dealing with customers and suppliers, and banking.
DBA vs. LLC: What’s Right for Your New Business?
Both DBAs and LLCs have several unique features that different business owners can interpret as advantages or disadvantages based on their individual needs. To help you decide whether to set up an LLC or a DBA, we’ve made a list of the most important factors each entrepreneur needs to take into account:
Formation and Maintenance
Both DBAs and LLCs are relatively simple to create. No matter which option you decide to go for, the steps include filing paperwork with the state and a filing fee. While formation procedures and fees for LLCs and DBAs may differ slightly from state to state, the costs of registering a DBA are generally lower than the ones facing business owners who are forming an LLC. Also, keep in mind that the most apparent bureaucratic difference between a DBA and an LLC is that the former requires filing renewal paperwork on an annual or biannual basis.
After filing for a DBA, you’ll be able to carry on with business as usual. On the other hand, after forming an LLC, you’ll be required to treat the company as a separate entity by following corporate formalities and drawing a clear line between your personal and business assets; otherwise, you could lose your liability protection.
Personal Liability
Unlike a DBA, an LLC provides liability protection, which means that if someone sues a limited liability company, its owner cannot be held personally liable. In other words, operating an LLC, a separate legal entity, means that your personal assets such as your bank account, car, and home are protected from creditors.
On the other hand, if you register a DBA, you’ll remain personally responsible for the obligations of your business, and your personal assets can be confiscated to cover any outstanding debts.
Tax Considerations
When making the DBA vs. LLC comparison, tax advantages are of the utmost importance.
If you choose to register a fictitious name, your business taxes and filing requirements won’t change. Here’s an example – if you owned a sole proprietorship before registering the DBA, the way you report your income and losses on your personal tax return remains the same.
Should you decide to form an LLC, you’ll have new tax considerations to keep in mind. These include filings with your state tax agency and the IRS and an opportunity to opt for corporate tax treatment. Additionally, some states limited liability companies must pay franchise taxes.
Trademark Protection
If you are still unsure whether you should choose a DBA or an LLC for your online business or any other company type, we suggest you evaluate both options by taking trademark protection into account.
Considering that you don’t have to choose a unique name when registering for a DBA, it means that someone else could be using your business to sell goods or offer services.
On the other hand, by forming an LLC, you can legally prohibit anyone operating in your state from using your company’s unique name.
However, neither an LLC nor a DBA can protect your business’s name on the national level. To do so, you’ll have to file for registration with the US Trademark and Patent Office.
Banking
As far as banking goes, both structures let owners make financial transactions under the names of their companies instead of their personal names.
DBAs enable partnerships and sole proprietorships to deposit checks and accept payments made out in the business’s name to any bank account associated with the DBA. Also, creating an LLC and opening a bank account under the same name enables you to accept checks made out to your company’s name.