LLC vs DBA: What is the difference between a DBA and an LLC??
Consider two fundamental differences between LLCs and DBAs when determining which business registration would suit your needs: liability protection is provided by LLC licensing while a DBA permits the sole owner/proprietor to operate their business under a fictitious name.
Another thing to consider is that LLCs can have a limitless number of DBAs. States assert specific requirements, obligations and expenses to an LLC applying for multiple DBAs but the benefits may outweigh the disadvantages in some cases. Also be aware that if your business is an LLC, the IRS will view each DBA you have registered as individual entities. This can pose state and federal tax problems involving loss claims for DBA while another DBA owned by the same LLC may be making a profit.
What is a Limited Liability Company (LLC)?
A Limited Liability Company (LLC) is a business that requires its owners to file paperwork with their appropriate state department defining the business as a “separate legal entity”. This means a specific LLC legally possesses property (buildings, equipment, computers related to the operation of the business, etc) and the owner(s) agree to disassociate their personal interests from the interests of the business.
Businesses registered as LLCs must include the acronym “LLC” somewhere in the official name of their business. Owners can include this designation in the name of their company as either “LLC” or “Limited Liability Company”. For example, if Mr. Bellman registered his catering company as an LLC, he would have to name his business “Bellman’s Catering Service, LLC” or “Bellman and Associates Catering Service, LLC”.
What is Limited Liability Protection?
Real estate property, vehicles and bank accounts of business owners registering their company as an LLC do not have to worry about losing these personal assets if they are sued or file bankruptcy. Alternately, DBA businesses are not provided with such protections. If you are the owner of a DBA company and you are sued or owe debts, your personal assets could be seized and sold to pay for debts.
Starting an LLC
In most states, two documents must be filed with the Secretary of State: an Operating Agreement and either a Certificate of Organization or Articles of Organization. Both LLC and DBA owners must obtain a Tax ID number from their state. If the company pays employees to perform work specifically for the company, owners must also receive an Employer ID number as well.
If someone other than the owner of an LLC chooses to have legal documents sent to a particular entity, they must appoint a “registered agent” to receive such documents. Of course, if you own the LLC, you can select yourself as the registered agent. But for most people, it’s easier, cheaper & faster to start an LLC using one of the many LLC formation service providers that will often also serve as your registered agent for a small yearly fee.
If members of an LLC wish to invest in the company, this information must be included in the operating agreement you submit to your state. Terms of members as investors should be clearly described to avoid possible legal problems in the future.
Advantages to Owning an LLC
In addition to limiting how much liability owners regarding their company, LLC registration also provides trademark protections concerning business names and logos and a variety of tax filing options to help reduce state and federal tax obligations. Moreover, selling or expanding an LLC is easier and cheaper to do than if you were to sell or expand a DBA business. Many states do not allow a DBA business to be sold. Owners of DBAs in states that do allow the sale of a DBA may find the process to be complicated, lengthy and expensive.
What is a Doing Business As (DBA) Registration?
If you are the legal owner of a business, you can obtain a DBA registration from your state using a trade name, assumed name or a fictitious name to call your business. States have different guidelines you will need to follow to get a DBA registration. We recommend researching your state’s laws regarding business registrations.
DBA registrations are necessary when business owners plan to use the name of their business on advertisements, letterheads, business cards, signs, and so on. However, you do not need to register your business as a DBA if you plan to use your last name in the name of your business.
For example, if Mark Bellman is launching a catering business as a sole proprietor and wants to call his business “Bellman’s Catering Service”, he does not have to apply for a state DBA registration. On the other hand, if Mr. Bellman is calling his business “Your Hometown Catering Service”, he will need to get a DBA registration since this is a fictitious name.
Changing the Name of an Existing Business
After advertising his business as “Your Hometown Catering Service” for one year, Mark Bellman thought he could gain more customers if he changed his company’s name to “Bellman’s Catering Service. Although he did not have to register his catering service as a DBA initially, he will need to do so now that he is using a nonfictitious name.
Other Reasons for Registering a Business as a DBA
Businesses with names that sound like there are fewer or more individuals who actually own the company must obtain a DBA license. For example, if Mark Bellman wants to call his catering company “Bellman & Associates Catering Service”, he will have to apply for a DBA. However, if Mr. Bellman and two other people co-own the catering service, he can avoid registering as a DBA company by including each owner’s last name in the name of the company.
Benefits of a DBA Registration
Meant to benefit the public over the business owner, the Doing Business As registration offers transparency about the business to consumers. The public has a right to know who legally owns a business for in case that they need to take the business for court over poor or insufficient services. Businesses registered as DBA will have all owners listed in a database usually found on the website of their state’s secretary.
Advantages of a DBA for business owners include privacy protections and the ability for owners to open company bank accounts. Through these accounts, owners can receive payments without needing to form an LLC. It also costs less to register a DBA than an LLC. If you are just starting a business, this gives you more funding to advertise your business.
LLCs, DBAs and Tax Regulations
Depending on the structure of an LLC, the owner(s) can file state and federal taxes as a corporation, a partnership or a sole proprietorship. Revenue earned by LLCs is “passed” on to the personal state and federal income taxes of owners and members of the company. This type of taxation is called “pass through taxation” and avoids LLC members from paying corporate taxes. Unique tax deductions may also be available to LLC owners that they could not get as owners of a DBA.
LLCs organized as corporations must file as a corporation using IRS Form 1120. The legal name of the LLC is considered the name used to file articles of corporation. Although corporations may register multiple DBAs, the names of the DBAs are not required for filing state or federal taxes.
Alternately, DBA companies do not qualify for “pass through taxation”. Instead, members of a DBA must file and pay taxes according to their individual filing status. For example, if a DBA is owned by one individual, that person will be taxed as a sole proprietor of a business. In other words, you are not permitted to use a filing status such as “head of household” if you own a DBA company.
Costs of Starting an LLC or DBA
Nearly every document you file to start your business will have a fee attached to it. Fees vary among states, with the cost of filing Articles of Organization as low as $40 to as high as $500. If you want to reserve a specific name for your LLC or DBA, you may have to pay a fee for that as well.
Most states also require annual fees from LLCs that go towards filing a Statement of Information or Annual Report. Paying the fee for filing a yearly report ensures LLCs continue enjoying liability protection and remain in good standing with state business guidelines and laws.
The IRS allows certain deductions for LLCs and DBAs that may apply for several years after the business begins operating. Limited liability company and general business tax rules can be found here and here on the IRS website.