Is it better to have an LLC or DBA?
Is it better to have an LLC or DBA?
If you’ve been considering opening up shop and starting your own business, you’ve probably been wondering what business structure you should be using. For many sole proprietors and partnerships, one of the major decisions to be made during the business start-up phase is whether to use a DBA (“doing business as”) or form an LLC (Limited Liability Company).
LLC vs. DBA
What’s the most significant difference between LLC and DBA? When you form an LLC, you are creating a separate legal entity. This entity carries on business from that point on, rather than you as an individual. When you register a DBA, however, it is still you who will be carrying on business, only you are doing so under the fictitious name you registered.
If you use your legal name to do business, in most states there is no requirement to register a DBA. However, a DBA, also known as a fictitious name, a trade name or an assumed name, is usually required when a sole proprietor or a partnership decides to go into business under a different name than their own legal names. For example, if your name is Jane Smith and you decide to do business as “Jane Smith,” there is usually no need to register a DBA; however, if you decide to do business as “Jane Smith Professional Services,” then in most states you would have to register a DBA.
DBAs are not restricted to sole proprietors or partnerships. If you’ve formed an LLC and your LLC wishes to do business under a name other than its legal name (the name it was created with), you’ll be required to register a DBA in order to do so.
Most states impose restrictions on what can be included in your DBA name. Sole proprietors and partnerships, for example, can’t use words such as “Corporation”, “Inc.” or “LLC” which imply that the business is anything other than a DBA.
Unlike a DBA, when you form an LLC you are creating a separate legal entity. After you’ve formed your LLC, you’ll be doing business under the LLC’s legal name, that is, the name you chose when you registered your LLC. Most states will require you to perform a name availability check when forming an LLC to ensure no other business is using the name you want to use for your LLC.
A major benefit of an LLC is the personal liability protection it affords its owners, and for many business owners this limited liability protection is an important consideration when deciding whether to use the LLC structure for their businesses.
Once you’ve formed an LLC, you’ll also be required to use your LLC’s legal name in all aspects of your business, from banking to dealing with suppliers and customers to filing government forms. As mentioned above, if your LLC decides to carry on business under a name other than its legal name, you will have to register a DBA for it to do so.
Personal Liability: DBA vs. LLC
One main difference between an LLC and a DBA is the limited liability protection you obtain when you form an LLC. Because an LLC is a separate legal entity, the personal assets of its owners—known as members—remain separate from the assets of the business. This provides LLC members with a measure of protection against creditors and also in the event of lawsuits.
A DBA, however, isn’t a separate legal entity, and when you register a DBA there is no distinction between your personal assets and the assets of your business. Registering a DBA has no impact on your personal liability as a business owner.
Start-up Fees and Maintenance Costs
Whether you decide to register a DBA or LLC, there will be start-up fees to consider. The costs varies from state to state; however, you will face lower costs and fees for DBAs than you will for forming an LLC in whichever state you live.
There are also ongoing maintenance fees associated with both DBAs and LLCs. As with start-up fees, these costs will be lower for DBAs than they are for LLCs. Generally, DBAs will need to periodically pay renewal fees. LLCs face a wider range of ongoing fees. Depending on the state in which you live, ongoing maintenance costs for LLCs may include annual filing or registration fees, annual report fees and annual franchise or entity taxes.
The choice between registering a DBA and forming an LLC is one of the major business decisions you, as a new business owner, must make. Forming an LLC is more costly than registering a DBA. However, it also provides you with the benefit of limited liability protection, which may be an important consideration in your business structure decision process.