As a new business owner, one of the most important questions you will ask yourself is, “How do I want to run my business?”
While there are many other questions you will need to ask yourself along the way, how you answer this first question will build the foundation needed to start your evolution. Business licenses fall under two categories: DBA and LLC.
Whether you are switching to freelancing or starting a solo business, you may need clarification about the difference between a DBA and an LLC. You need to know what makes them different so you can answer your first question.
This article breaks down five key differences between running your business as a DBA versus an LLC. By analyzing the pros and cons of each and the associated risks and liabilities, you can feel better informed as you decide how you want to do business. We also discuss how a CRM can help you stay on top of keeping your business organized.
What is a DBA?
DBA is an acronym for “doing business as.” As a sole proprietor, a DBA allows you to conduct business under a name that is not your legal name, known as a “fictitious business name” or an “assumed name.” Those operating a sole proprietorship must use their legal name as the name of their business unless they have registered a DBA with their local business licensing entity.
Small business owners may choose this option if they want to have a clear separation between their legal and business names in favor of more privacy. They may also select a DBA because the process is far less cumbersome and requires less upfront cost than an LLC.
With a DBA, there won’t be the same level of liability protection as an LLC because it is not a business structure. It is solely a means to use a different name to conduct your business.
What is an LLC?
LLC stands for “limited liability company.” Forming an LLC provides a built-in legal business structure and liability protection for the business owner. Because an LLC is an entirely separate entity from the owner, any lawsuit brought against the LLC cannot affect the owner’s personal assets.
Small business owners who want liability protection and exclusive rights to their business name are more likely to file for an LLC. While this option costs more upfront, the protection it provides is essential to many business owners, depending on the type of business.
Any business that registers as an LLC must also have a separate business bank account and interact with all customers and clients under the name of the LLC.
DBA Name Restrictions
With DBA filing, it is vital to do some research beforehand to see if another person is already using the same business name within your industry and geographical region. You also want to ensure there aren’t any existing trademarks within your home country.
Depending on your business’s location, there are different rules and regulations around what you can include in your business name. So make sure you know what’s in place in your area.
A DBA is also prohibited from including any misleading information in a business name. For example, one may not have abbreviations like “LLC” or “Inc” in their name if they are not registered under these specific business structures.
LLC Name Restrictions
Like a DBA, LLCs can’t use a name that already belongs to another business in their state or region and may not infringe on any trademarks within their home country. Like a DBA, LLCs should read up on local rules and regulations before applying to avoid hiccups.
5 Key Differences Between a DBA Vs. an LLC
Now that you know the definitions of DBA and LLC, there are five key differences between the labels, which may help you decide which route to go with your small business.
While both options will allow you to operate under a different business name, they differ significantly in how you will manage your business based on your chosen option. Depending on your type of business, there should be a clear winner based on the following differences.
Ownership and Management
DBA: If you do not register your business under a specific business structure, you are automatically considered a sole proprietor or partnership. Registering a DBA means you can do business under a different name, and it is not a business structure. It is also important to note that a DBA does not guarantee exclusive rights to your business name.
LLC: An LLC is owned by “members,” which may consist of one or more individuals, corporations, or other LLCs. Registering your business as an LLC separates it from your personal assets because it is a separate legal entity from the owner or owners. With an LLC, you also have exclusive rights to your business name so long as you have done your due diligence to ensure no other business is operating under the same name and there are no existing copyrights.
Legal Liability
DBA: This may provide business owners with some privacy by using a business name different from their legal name. It does not offer any protection against legal liability. In the event of a lawsuit against your business, all of your personal assets are fair game.
LLC: An LLC will protect your personal assets should a lawsuit be filed against your business. Because the business entity is separate from the owner, no one can touch your personal bank account, home, or other investments.
Taxes and Reporting
DBA: Filing taxes is relatively easy. Your business profits are passed through your individual tax return and taxed accordingly. Beyond this, there are no tax advantages for a DBA.
LLC: Filing taxes as an LLC provides several options for how you would like to file. LLCs may file as a sole proprietor, partnership, s corporation, or corporation. Selecting the best option may save your business money.
Formation and Registration
DBA: This is the most affordable and least complicated option of the two. The fees vary depending on your location; however, they are modest and easy to file anywhere. You may be required to provide a published notice of intent in some cities, so you should refer to your local business licensing agency for specifics.
LLC: You must pay an initial LLC filing fee and an annual or biannual fee. These fees also vary depending on your location. You will be responsible for additional charges if you hire a lawyer to help you with this process.
An operating agreement, known as an Article of Organization (sometimes called a Certificate of Organization), is required for all LLCs. This document outlines responsibilities and how each business stakeholder will conduct business.
Perpetuity and Transferability
DBA: A DBA can’t receive perpetual existence. Meaning the business is not a separate legal entity from the owner. As such, it cannot transfer over to another person.
LLC: On the other hand, an LLC may receive perpetual existence. Therefore, the business is a separate legal entity. Meaning an LLC to can transfer over to new members or owners.
Pros and Cons of a DBA
Pros
- Separate business name
- Easy filing process
- Less expensive
Cons
- No liability protection
- No tax benefits
- Is not a business structure
Pros and Cons of an LLC
Pros
- It is a legitimate business structure
- Provides liability protection
- Protects personal assets
- Exclusive rights to a business name
- The business owner does not hold personal liability
- more tax flexibility
Cons
- Requires more ongoing paperwork than a DBA
- It costs more upfront to register your LLC
- Must adhere to more stringent local laws
- State fees may be high depending on your location in the US
Who Should File for a DBA?
A DBA may be a good fit for your small business if you want to keep your costs and recurring paperwork as low as possible. This option tends to attract freelance workers who aren’t providing physical goods because they aren’t as concerned with having liability protection as other types of businesses.
Who Should File for an LLC?
It comes down to the amount of liability protection you require for your business.
An LLC can fit any sized business, from a sole proprietorship to a small business with multiple employees. Its key benefit is that it frees you from worrying about your personal assets and allows you to focus more energy on operating your small business. While there are more upfront fees, and the paperwork is heavier, the liability protection of an LLC is priceless.
There is also the added benefit of more tax flexibility when you start an LLC.
Conclusion
Knowing what you want from your small business will help determine whether you want a DBA or to start an LLC. If you aren’t sure which option is the best for you, discuss your options with an attorney or tax advisor. Ultimately, the more prepared you are, the better you will feel about making a decision.
There are many legal and financial ramifications around how you structure and choose your business name, and DBAs and LLCs have their benefits and drawbacks. Depending on your desired level of liability protection and the amount of paperwork you are willing to do, you may lean more heavily in one direction. The choice is yours, so choose wisely.
Next Steps for Business Owners
Whether you go for an LLC or a DBA, there are additional steps to take as you establish your business.
- Obtain insurance for your small business! As a business owner, you protect your practice and boost your professionalism when you have business insurance. This is just as important for freelancers and businesses of one as it is for brick-and-mortar establishments.
- Decide if working with a CRM is suitable for you. There are many moving parts to running a small business. If you are a solo business owner, you may benefit from a CRM to help you run your business smoothly.
Practice helps solopreneurs and coaches organize their day-to-day tasks with our customer-relationship-management (CRM) platform. You can do everything from securely storing your clients’ data to scheduling meetings and receiving payments in one convenient place, saving you time to do more of what you love with less headache. Get started today with a free trial.
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