DBA or LLC? This is the Hamletian dilemma that most budding business owners in the United States inevitably face. In the paragraphs that follow, I shall sketch the key advantages and disadvantages of the two business structures in brief.
DBA vs LLC: what does each stand for?
DBA, trade name, fictitious business name
DBA stands for “Doing Business As.” I’d like to emphasize that as a sole proprietor, you’ll have zero liability protection. Because all sole proprietors are personally liable for all business operations they conduct, they can’t just assume a different trade name without filing for a DBA registration first.
The penalties may be severe: penalties, hefty fines, and expensive lawsuits. Therefore, you should file for a DBA, which is also known as a fictitious business name. For example, your sole proprietorship may be registered under the legal name John Smith, but it can file for a DBA and open a business bank account under the secondary business name John Doe.
Sole proprietorships use DBAs to assume a proper trade name that will correspond to the types of services and products that they sell. Interestingly, LLC and partnerships can also file for a fictitious business name or DBA.
LLC – Limited Liability Company
As a budding small business owner, the wisest thing you can do is form an LLC. This type of separate legal entity allows the owner to enjoy full personal liability protection. And this is just one of the benefits of an LLC.
In other words, if your small business goes into legal trouble, you are not going to be liable for it with your personal assets, including your home or savings account. As a separate legal entity, your limited liability company may file for bankruptcy at any time without exposing the business owners to legal risks.
Benefits of an LLC
Liability Protection
The very abbreviation suggests that the business owner assumes limited liability for the operation of the legal entity. For example, if a customer gets a scalp rash after using your shampoo, they can file a claim for compensation against the LLC, but not against you as a natural person. If your LLC runs into business, you won’t be held personally liable unless you have guaranteed for them.
Easy Set-up
Depending on the state where you want to form an LLC, you have to complete a few easy steps. I am going to look at them shortly. Most often, the LLC filing process is completed online. Once the filing is completed, you should visit the IRS website and apply for an Employer Identification Number (EIN).
No Partner Restrictions
You can form an LLC with you being the sole member of the legal entity. Later, you can call in as many members and partners as you want.
LLC vs DBA Tax Advantages
As an LLC, you can choose to be taxed as a sole proprietorship, partnership, or S corporation. If you choose the last option, keep in mind that an S corporation is a type of tax election wherein tax liability belongs to its shareholders.
An LLC can outlive its owner
A key difference between a DBA and an LLC is that the latter business entity can continue to exist even after the owner has sold their shares or passed away.
An LLC can attract investors
Each of the members of an LLC can also be an investor. This allows the owner greater financial flexibility when it comes to signing contracts for future supplies.
Benefits of a DBA
Let me emphasize once again that a DBA is not a separate legal entity. Rather, this is a form you file when registering a sole proprietorship to reduce start-up costs. This is just a fictitious business name that allows your proprietorship to operate as “business something.”
Low Cost
A DBA is cheap to file for and lets you have as many business aliases as you need. Once the DBA is registered at a state level, you will be able to do business under a name of your choice. The specific DBA registration requirements may vary depending on the state where you run your small business.
A fictitious name for every business activity you launch
As a sole proprietor, you may want to launch different business activities simultaneously without registering new business structures. A DBA allows you to use fictitious names instead of creating separate legal entities by merely writing the fictitious name for each new business activity that you launch. The legal name of your business will only serve as the anchor for your multiple business arms.
Privacy protection
If you do not want the public to associate your name with a particular type of business, then a DBA registration can help you conceal your company’s legal name.
Solves the problem with an unavailable business name
The “business something” name that you wish to operate under may not be available in a particular state. You can then file for a DBA registration and obtain a different business name that will allow your business to expand to new markets.
A DBA boosts brand awareness
When your small business assumes an attention-gripping fictitious name, the locals will become more aware of your brand. A catchy trade name will help you to better market your products or services in different states.
Compliance
Filing for a DBA lets you use a business name in compliance with the state requirements without having to register an LLC or a partnership.
DBA vs LLC: Which is easier to set up?
Let me now look more closely at the steps you have to take to register an LLC and DBA to help you decide on a DBA vs LLC.
Form an LLC
Step 1: Choose a state where you’d like to open a limited liability company. To make an informed choice, keep in mind that the different states have different fees, taxes, and LLC laws.
Step 2: Pick up the name of your limited liability company. To form an LLC, you’ll need a business name that is not already in use. You’ll have to conduct an LLC name search in the state where you wish to form it. If you spot a catchy name, hurry up and book it even if you are not ready with all of the filing documents.
Step 3: Pick up a registered agent service. You have to pick up a registered agent in the state of formation or qualification. A reliable registered agent like ZenBusiness will process and receive important legal and tax documents on behalf of your LLC against an affordable annual fee. The registered agent must also have a physical address in the state of formation.
Step 4: Get an LLC Operating Agreement. This document is essential for multi-member limited liability companies, as it spells out spell the division of ownership, labor, and profits. You can ask your online LLC formation service to draft one for you.
Step 5: File Your LLC with Your State. Unlike an S-corporation, an LLC does not have any Articles of Incorporation, and it is therefore organized or formed. To become fully operational, an LLC needs to have its Articles of Organization filed with the Secretary of State’s Office.
Step 6: Obtain an EIN. Having filed the Articles of Organization, you must now file an online application on the IRS website for an employer identification number (EIN). Your LLC will use the EIN on all its bank accounts and tax filings. In each state where your LLC is going to operate, you must apply to the state’s tax department for a sales tax identification number.
Set up a DBA
Choose your state
When choosing a state where you’d like to file for a DBA, keep in mind that some states require applications at a local level only, while others require state and county filing. The state may also require a public announcement in the newspaper.
Provide your SSN or EIN
To file a DBA, you’ll have to use your Social Security Number (SSN). If you already have a federal tax ID number (EIN) as a sole proprietor, you may use it to apply for a DBA.
Carry out a DBA name search
No matter if you are forming an LLC or DBA, you’ve got to find a name first. Once you’ve picked up an available name, make sure that it is compliant with the state’s requirements. If you need help, you can use a business name generator with toggle navigation or resort to a How-to-find-a-business-name guide. You should also book a domain name for your DBA as soon as you come up with its business name.
Register Your DBA in Your State
Many states allow business owners to file DBA registration through the County Clerk’s Office. Next, you should request a DBA form from the Clerk and fill in your chosen DBA name, your sole proprietorship’s official name, your name, and address, and your business address.
Do not forget to sign and date your form before submitting it, along with the state fee. Your DBA is now active and will remain such for four or five years, depending on the state. You can eliminate all this paperwork and stress by completing a DBA filing form on the website of ZenBusiness.
How much does it cost to form an LLC?
This question may decide the outcome of the DBA vs LLC contest. The price of LLC registration depends mainly on the online registered agent’s fees. Some online legal advisors like ZenBusiness include a registered agent service in their basic plan, while others like LegalZoom have a fixed LLC formation fee.
All online platforms charge an LLC formation fee plus the respective state fee. The state fee covers the filing of your company’s Articles of Organization with the Secretary of State. Depending on the state, this filing fee can reach up to $500.
If you register an LLC in the state of Arizona, Nebraska, and New York, keep in mind that they also charge a publication fee.
If you’re forming an LLC in Alabama, you will also have to pay a mandatory name reservation fee that varies between $10 and $30.
Some of the most expensive states to register an LLC are:
- Massachusetts: $500 set up costs + $500 annually
- District of Columbia: $220 set up costs + $300 biennially + annual franchise tax
- Alaska: $250 set up costs + $200 biennially
Some of the cheapest states to form an LLC are:
- New Mexico: $50 set up costs + $0 annual fee
- Kentucky: $40 set up expenses + $15 – $30 annually + annual entity tax
- Utah: $70 set up costs + $20 annually
How much does it cost to form a DBA?
DBA application fees vary by state, county. However, all the paperwork and filing fees should not exceed $100. You can file a DBA form online through the website of an online legal service provider. It appears that filing for a DBA online may turn out to be more expensive, starting from S99. That’s because you will have all the forms filled in and filed for you.
DBA vs LLC: Which one is for you?
You should opt for an LLC if you plan to launch a small or mid-sized business that will have suppliers and employees and sell products or services to multiple customers. In this case, you are going to need liability protection that only an LLC can provide.
You should register an LLC if you need the flexibility to pay your taxes as a sole proprietorship, partnership, S corporation, or corporation.
Finally, you should form an LLC if you plan to run your small business for a long time and possibly draw in investors.
File for a DBA if:
You are a freelancer, a small sole proprietor, an artist, or a craftsman who sells his own products to a small number of customers. As such, you may want your personal name to be hidden from the public eye and use your brand name instead.
As a sole proprietor with an active DBA, you will be personally liable for all claims that your business may face. Even so, you should opt for a DBA if you think it is highly unlikely to face legal claims in the course of your operations.