Is it better to have an LLC or DBA?

When people think about starting a business, they often go right to imagining their success. That's what gets the juices flowing. But to achieve real success, you need smart preparation and a good understanding of the risks involved.

To help you prepare, learn the differences between a DBA and an LLC and the pros and cons for each.

What is a DBA?

DBA stands for “doing business as." It can be referred to as a trade name, assumed name, or fictitious name. You may want to file a DBA name for your new business instead of using your own personal name or your legal business name. Think of a DBA as an alias. Classic DBA scenarios include:

• An established business wants to create an offshoot company or rebrand itself. Rather than going through the time and expense of creating a new LLC or corporation, they create a DBA instead.
• A company wants to expand into a new state but finds their current business name is already taken in that location. Creating a DBA easily solves that problem.

DBAs have some downsides, however:

• It is neither a business structure nor a legal entity. It's simply a name that brands your business, not your legal name.
• It does not necessarily give you exclusive rights to the DBA name. Depending on your state's rules, someone else could file the exact same name and be approved for use.
• A DBA does not protect your personal assets, so in the event of a lawsuit against your business, your personal bank accounts, car, or home could be at risk.

What is an LLC?

A limited liability company or LLC is a structure that establishes your business as its own distinct legal entity. The main advantage of this structure is liability protection. If your company goes bankrupt or someone sues your business, you're generally not held financially responsible for your company's debts or liabilities—unlike with a DBA.

How does a DBA differ from an LLC, tax-wise?

Fortunately, filing your taxes is fairly easy in both cases. Your business profits are only taxed once. They're passed through to your individual tax return and taxed accordingly.

Other than that, a DBA has no tax advantages. But as an LLC, you have more flexibility in how you choose to be taxed. You can file as a sole proprietor, partnership, S corporation, or corporation. How you decide could save you some money come tax time.

What are the differences in filing fees between a DBA and an LLC?

An LLC is much simpler and less expensive than creating a corporation—but a DBA is even less expensive and simpler still.

• LLC: You'll need to pay an initial LLC filing fee and an LLC annual/biannual fee. Costs vary by state. In Kentucky, for example, the LLC filing fee is $40, and the annual fee is $15. Massachusetts, however, requires a hefty $500 filing fee and $500 annual fee. If you hire an attorney to assist you or file online, you may incur more fees.
• DBA: DBA filing costs depend on where you set up shop. In California, it can cost $40 to file for just one DBA name and one owner, with an additional fee for each additional owner or DBA name listed on the same filing. Some cities require that you publish a notice of intent in your local newspaper in order to use your DBA name, and costs are associated with that. Keep in mind some states allow you to use your DBA for as long as you like without having to re-register, while others require you to refile every year.

What about ongoing reporting responsibilities?

Some states require LLCs to create an operating agreement that details responsibilities and how the company's members, managers, and officers conduct business. Many states also require an LLC to report every year or two years on any updates to current business locations and activities in the state, as well as any changes to current members and managers. An LLC also needs to identify a registered agent responsible for receiving any legal documents in case of a lawsuit.

With a DBA, other than paying a fee to re-register, there are generally no ongoing responsibilities incurred.

Recap of DBA and LLC advantages

A DBA:

• Is simple and less costly to establish
• Involves less paperwork and bureaucracy than an LLC
• Simplifies taxes
• Affords you some privacy—your personal name won't be exposed every time your business is mentioned in the media

An LLC:

• Is a bona fide distinct legal entity
• Offers limited liability protection to help protect your personal assets from lawsuits and liens against your business.
• Has name exclusivity—once approved, no one else in your state can use your name
• Simplifies taxes
• Offers more flexibility in how you file your taxes

Recap of DBA and LLC disadvantages

A DBA:

• Is not a business structure
• Offers no liability protection—you are financially responsible for debts and liens against your business
• Has no name exclusivity
• Brings no tax savings

An LLC:

• Is more formal and entails ongoing paperwork
• Requires more out-of-pocket expenses to establish and maintain
• Must adhere to state laws governing LLCs

The right business structure can make all the difference in the world, so consider carefully and choose wisely.