DBA VS LLC: What is the Difference & Which Is Best

After building your business, the next thing to do is decide which structure you want for your business. The name you choose to use and how you officially structure your firm may have long-term legal and financial consequences for your company. So, which is better for your business: DBA or LLC? Here, we will discuss the differences between an LLC and a DBA, including the benefits and pros and cons. That way, you can make an informed decision when the time comes.

DBA vs LLC: General Overview

What Is a DBA?

DBA is an acronym that stands for “doing business as.” Most states require you to get a DBA if your business name differs from your legal name or the name of your LLC. In the United States, these fictitious business names are required in order for people to recognize the firm’s true identity. They also help to prevent dishonest business owners from frequently altering their company name in order to avoid legal troubles.

What Is an LLC?

One of the most popular business formats for small business owners is a limited liability company (LLC). This is because LLCs insulate owners from responsibility by separating your company’s assets from your personal finances in the event of a lawsuit. It may also provide financial benefits to the owner due to the possibility of pass-through taxation. Following the creation of an LLC, your business must operate under the LLC’s registered name.

DBA vs LLC: Benefits

The Benefits of a DBA

Using a DBA to conduct business is an excellent way to promote your company or protect your identity as a small business owner. A DBA also has the following key advantages:

It is less expensive than forming an LLC.
Additional precautions for privacy
Possibility of opening a business bank account using a DBA name
The adaptability of marketing and branding
There will be less paperwork to keep track of.

The Benefits of Forming an LLC

The formation of an LLC offers various benefits to small business owners. This type of business entity helps to limit the owners’ personal liability while also giving numerous tax benefits. Other important benefits of forming an LLC include:

Setup is simple.
Pass-Through Taxation Alternatives
Adaptability in ownership and cooperation
Capability to distribute profits
Accepting investors is a possibility.

DBA vs LLC: Differences

Both an LLC and a DBA permit the owner of a business to use their registered business name rather than their legal name. Both will also allow you to open a bank account in the name of your firm.

What Is the Difference Between a DBA and an LLC?

#1. Formation and Compliance Paperwork

To file a DBA, all that is required is to fill out and submit documentation to the Secretary of State or another business entity requesting permission to use a specified fictitious name. In general, states just require a nominal one-time fee. Many states require yearly DBA renewals, which can range from one year to ten years depending on the state. A DBA name is unrelated to any ongoing business formality (such as annual reporting or licenses).

You must complete and file Articles of Organization (also known as a Certificate of Organization) with the state, as well as pay an entity registration fee, to incorporate a limited liability corporation. Other documents, payments, reports, and duties may be required as well. State regulations vary. Furthermore, LLCs are governed by their LLC Operating Agreement, which requires owners (referred to as members) to obey the rules of that agreement, which cover company management, profit distributions, member disputes, and so on.

Tasks for LLC Compliance Examples

Selecting a Registered Agent
Obtaining business licenses and permits
Obtaining a Federal Tax Identification Number (EIN)
Submission of the Annual Report
The requirement to pay an LLC franchise tax
Annual Meeting Planning and Minute Keeping

#2. Business Name Protection

When someone registers a DBA, it does not usually grant them the exclusive right to use that name. Other firms in the state may also be allowed to use the name. While a few states protect registered fictitious names by refusing to allow too similar names, the majority do not guarantee exclusivity.

Because the state does not generally permit the registration of another company (or a DBA) with the same name, incorporating an LLC provides stronger business name protection. However, if a business name is used by a corporation that provides wholly different products or services than the LLC seeking to use the name, the state may permit both entities to use the name.

Business owners can apply for a federal trademark with the United States Patent and Trademark Office (USPTO) for more extensive business name protection.

#3. Business Owner’s Liability

A DBA does not create a legal entity separate from its owners. It’s only a name; it doesn’t exist independently of the solo proprietor, partners, or corporate entity who registered to use it. As a result, the individual(s) or corporate entity in charge of the DBA is personally liable for any legal or financial issues that develop as a result of it. In the case of sole proprietorships and partnerships, individual owners’ personal property (including their homes), retirement savings, bank accounts, and other assets are at stake.

An LLC, on the other hand, is a legal entity distinct from its owners. That is, in most situations, the members of an LLC are not personally liable for the obligations or legal problems of the corporation. As you can assume, this provides peace of mind to entrepreneurs who want to protect their own assets!

#4. Taxes

Sole proprietorships and partnerships that use a DBA have only one income tax option: pass-through enterprises. Any DBA profits and losses are reported on the owners’ personal tax returns, and any earnings are liable to both income tax and self-employment taxes (Medicare and Social Security).

Similarly, if an LLC or corporation uses a DBA, any taxes related to commercial activity conducted under the DBA are recorded on the LLC’s or corporation’s tax return. S Corporation tax classification is available to LLCs that meet the IRS eligibility requirements. As a result, instead of all firm profits being subject to Social Security and Medicare taxes, only the wages and salaries of the owners are. Some entrepreneurs may be able to minimize their overall tax burden as a result of this.

DBA vs LLC: When Do You Need Them?

In some circumstances, using both simultaneously may be appropriate. An LLC that conducts multiple businesses or websites may employ a DBA. An LLC, on the other hand, does not require a DBA.

How to Create an LLC

Before you can make your LLC official, you must go through the following steps:

Select a name
Select a registered agent.
Fill out an LLC Operating Agreement.
Complete documentation in the state where you do business.
Get an EIN.
Obtain a certificate from your state.

How to Obtain a DBA

DBA requirements may differ depending on where you do business (city, county, or state). Make careful to check with your local jurisdiction before enrolling. To register for a DBA, do the following steps:

Select a name
Fill out the necessary fields.
Sort through your documents.
Publicly announce the filing by printing a notice.

DBA vs LLC: Pros and Cons

Here’s a look at the pros and cons of a DBA vs. LLC.

DBA Pros

Allows sole proprietorships and partnerships to name their businesses in a unique way.
It is simple and inexpensive to put up.
Less conformity than a corporation
Tax liabilities are moved to the tax return of the business owner.

LLC Pros

Aids in preventing other businesses in the state from using the same name (also known as name exclusivity).
Creates a separate legal entity
Personal liability protection for the business owner.
Allows for tax flexibility, which may reduce a business owner’s tax liability.

DBA Cons

In most states, this does not preclude others from using the name (there is no name exclusivity).
It does not establish a new legal entity.
Personal liability protection is not provided to the business owner.
There are no tax breaks or savings available.

LLC Cons

Establishing requires more paperwork and time.
It costs more to set up and maintain.
It must adhere to ongoing company compliance regulations.

DBA vs LLC in California

A DBA is one of California’s most popular business tactics. Most small businesses prefer to operate under an assumed name or do business as (DBA) rather than incorporate since it is much easier and less expensive. However, there are numerous key differences between registering a DBA and forming an LLC in California.

DBA

A “Doing Business As” (DBA) is a name used by your firm that is distinct from its official, legal name. If you want to start a business called “Best Cat Grooming,” but don’t want to use your own name, you can register it as a DBA. You will remain liable for all transactions involving that company. People create DBAs because California law does not require them to go through any formalities when creating a business under a fictitious name.

LLC

An LLC, or “Limited Liability Company,” protects the personal assets of its owners from the dangers of running a business. As a result, if you are sued, an LLC protects your personal assets. This indicates that forming an LLC is advantageous if you fear you may be sued for something, but it is not advantageous if you run a sole proprietorship.

To form an LLC in California, the owners must file articles of formation and pay a filing fee with the Secretary of State. More information on forming an LLC can be found on our blog.

How to Form a DBA in California

A California DBA is straightforward and affordable to establish. For $30, you can register your business name online at the Secretary of State’s website. When you fill out your business name, it will be published in California’s official state newspaper, where creditors looking for you can find you. Include your new business name when completing contracts or transactions to warn individuals that they are doing business with your organization under an assumed name.

How to Form an LLC in California

In California, forming an LLC is slightly more complicated than forming a DBA. This is because you must file articles of incorporation and pay a filing fee with the Secretary of State’s office. Here are some things to consider when forming an LLC in a state like California:

Your business name cannot be the same as that of another California-registered business. Your company name must include the words “Limited Liability Company” or “LLC.” It may not include words, abbreviations, or phrases associated with other types of organizations, such as Bank, Incorporated, Insurance Company, Corporation, or Limited Partnership.

All limited liability companies in California are required to have a designated agent, who is an individual or company who agrees to accept legal papers on the LLC’s behalf if it is sued. Although it is not possible to incorporate an LLC online, you can file your articles of incorporation with the Secretary of State for $70.

If you utilize an assumed name (DBA) or “doing business as” name, it must match the name of the LLC. If it is not, all firms in California are required to add the phrases “Registered Agent – Principal Office.” This is owing to the absence of legal entity of sole proprietorships, and when suing a single proprietor, the plaintiff sues the owner’s personal assets.

In California, a Limited Liability Company cannot do business under any name other than its legal name. This means that if your company is ABC LLC, you cannot do business under another name without first registering a DBA or false business name.

When Should I Employ a DBA in California?

A DBA differs from an LLC in that a DBA protects you from creditors looking for assets, whereas an LLC protects your personal assets if you are ever sued. Clearly, establishing a DBA is advantageous if you intend to run a business that may expose you to legal action.

This means that if you want to start a sole proprietorship, you must file a DBA. However, unlike an LLC, DBAs do not protect your personal assets from any duties or liabilities incurred as a result of doing business under a fictitious name. This is crucial because creditors can confiscate any assets in your name if your business collapses and you owe them money. Furthermore, if someone is hurt while doing business under your DBA’s name, the affected party may be entitled to sue you personally for compensation.

When Should I Make Use of an LLC in California?

To protect your personal assets in California, it is recommended that you form an LLC. An LLC provides the same level of protection as a corporation, which means creditors cannot seize your personal property or bank accounts in order to collect debts.

However, if you file an LLC with the Secretary of State but do not conduct business under its name (merely saying “doing business as”), the entity becomes disregarded. In this case, the LLC will not provide its owner with any liability protection against the company’s legal issues.

What’s The Advantage Of An LLC Over a DBA?

In most cases, registering a DBA does not grant you exclusive rights to use your company name. Forming an LLC gives you further protection since it precludes another company entity in your state from being formed with the same name as yours.

Is There any Benefit to a DBA?

Filing for a DBA can help to streamline the process of launching a new business while also cutting initial costs. This means you won’t have to deal with the procedures and liabilities associated with establishing an LLC or firm, such as record-keeping.

What Is the Purpose of a DBA?

The purpose of registering a DBA name is to notify the public that a specific individual or business entity is operating under a name other than its legal name.

Does Having A DBA Affect Taxes?

Self-employment tax applies to all DBA profits.

DBA vs LLC: Conclusion

Establishing a DBA or LLC is relatively inexpensive. You can file your documents with the Secretary of State yourself, or you can hire an attorney to do it for you and answer any questions you may have.

There are legal and financial consequences when determining how to incorporate and name a firm. As a result, entrepreneurs should seek the advice of competent professionals who can assess their specific situation and guide them to the best solution.