You’re crushing it as a solopreneur and are ready to take your firm to the next level by operating under an official business name. When a sole proprietor wishes to professionalize their brand, they have two options: a DBA or an LLC. But which one is the best?
There is no one-size-fits-all approach when it comes to the pros and cons of each option.
Considering how each one could help you reach your business goals is helpful. To help, we’ve made this detailed guide comparing DBAs and LLCs.
what is a DBA?
“Doing business as,” or DBA,” is a name your business uses instead of its legal name. For sole proprietors, having a DBA means you can do business under a name other than yours.
what is an LLC?
A limited liability company, or LLC, is a business with its legal identity separate from its owner’s. This corporate structure shields your personal assets from any liabilities incurred by your company.
the benefits and drawbacks of DBA
There are plenty of benefits to filing a DBA, We’ll discuss them here so you have a full understanding of the DBA before you register one.
advantages of DBA
branding: A DBA establishes separate marketing personas for single proprietors and LLC owners, making it easier to contact target consumers. It also implies that your DBA name can be legally used on business cards, stationery, and promotional materials. In some circumstances, you may need multiple DBAs to create separate brand names and websites for different product categories.
bank account for a business: As a sole proprietor, you can create a business bank account using DBA and collect payments under a name other than yours. It will also assist you in keeping your personal and corporate finances separate, saving you time and effort come Tax Season.
affordable: Even low-income sole proprietors can afford to register a DBA. Registration fees range from $10 to $25 in several states.
helpful resource: business entities understanding tax implications
The setup is straightforward. It is simple to set up a DBA. The process varies by state, but it is often simple and takes only a few weeks. Sometimes, it can take as little as one or two business days.
privacy: A DBA can help you keep your personal information private, whether you operate your own business or are part of a partnership. Remember, though, that the name of a DBA owner is public record, so if people genuinely want to know who owns your firm, they’ll eventually find out.
disadvantages of DBA: There are plenty of disadvantages to filing a DBA, but there are also several drawbacks that include.
personal responsibility: A DBA does not legally safeguard your assets, so if something goes wrong and someone sues your DBA, they are suing you personally. It implies you must pay related costs with funds from your assets and accounts. If your company fails, any debt it has acquired is your responsibility.
there is no legal title to the business name: Your DBA merely serves as a trading name, and you have no legal title to the name you chose for your DBA in most states. You cannot prevent others from using the name because you do not have exclusive rights. You must trademark your DBA name to get legal rights to it.
This process is costly, and you may pay considerably more if you want legal guidance or representation during the trademark process.
there are no tax advantages: Sole proprietors who only do business under a DBA do not obtain the same tax benefits as LLCs and corporations. As a result, your tax return receives any money your business makes and applies the appropriate taxes.
you may like to read: the consequences of missing tax deadlines
the benefits and drawbacks of LLC
There are plenty of benefits to filing an LLC, but there are also several drawbacks. We’ll discuss them here so you fully understand the DBA before you register.
advantages of becoming an LLC
personal liability is limited: The formation of an LLC creates a legal entity distinct from its owners. As a result, the LLC is legally liable for any debts or liabilities it incurs. Even if you own the firm, your assets are safeguarded if it is sued, incurs considerable debt, or declares bankruptcy.
legal ownership of a business name: No one in your state can use your company name when you form an LLC. You must still register with the United States Trademark and Patent Office to protect your company’s name nationally.
credibility has increased: The initials LLC in your company name indicate legitimacy and credibility. It also conveys that you are serious about your company. Please remember that DBAs cannot include words and phrases like “LLC” or “corporation” in their names.
tax adaptability: As an LLC, you have more power over how you are taxed. Although most LLC owners prefer pass-through taxes, they may elect to be taxed as corporations if doing so saves them more money.
disadvantages of an LLC
Let us have a look at the disadvantages of LLC.
expensive: Forming and running an LLC is usually more expensive than registering a DBA. Many states also charge recurring fees for annual repeated and/or franchise tax payments. DBAs only need two payments for registration and one every five years to keep the business going (check with your state for the exact renewal time frame).
paperwork: Because most states mandate annual LLC filings, an LLC often involves more paperwork than a DBA.
DBA Vs. LLC
Both alternatives allow businesses to operate under a business name other than their legal name. They share certain similarities, yet they also have considerable distinctions. Choosing one or the other impacts a company’s costs, compliance obligations, and other areas of corporate operations. The differences between DBA Vs. LLC is
filing taxes
Sole proprietorships and LLCs operating under a DBA are both “pass-through” firms, which means neither is required to file a separate company tax return. Instead, the revenues and losses of the business are passed through to the owner’s personal income tax return.
On their personal tax returns, LLC members and sole proprietors pay federal and state income and self-employment taxes on their business revenue.
taxes as a sole proprietor operating under a DBA
Sole proprietors who use a DBA are exempt from filing a separate business tax return. Instead, submit your individual federal taxes once a year and account for your business revenue and expenses by filling out a Schedule C form in addition to your regular personal income taxes (Form 1040). Following that, you will pay your taxes based on your tax rate.
In addition to paying payroll taxes, typically used to pay for Medicare and Social Security, you will also need to pay a self-employment tax on your business profits. You may also need to file state returns, which can be done annually or periodically, depending on the state.
read more: reporting non-employee compensation form-1099 NEC
paying taxes as a sole proprietorship
The IRS sees single-member LLCs as sole owners by default, much like a DBA, and business gains or losses are passed through to your personal income taxes. You can also file your business taxes as an S corporation as an LLC utilizing Form 8832.
While it’s not the most usual move for most single-member LLCs, it has been known to save some business owners thousands of dollars, so it’s worth investigating.
DBA Vs. LLC: documentation
Both are forming an LLC, and establishing a DBA requires submitting documents to your state and paying a fee. Despite these similarities, LLC expenses are typically more extraordinary, and limited liability corporations must also complete more paperwork and follow stricter restrictions than DBAs.
how to request a DBA
Before conducting business under your DBA name, you need to register it with a local, county, or state government. Begin by visiting the websites of your secretary of state or county clerk’s office to learn about the registration requirements in your area.
You’ll usually find everything you need to know right here, including a search tool for your selected name (here’s Los Angeles County’s fictitious business name search tool) to see if your preferred name is available.
Once you’ve confirmed that your DBA name is available, you can begin the paperwork to file your DBA. There should be a few pages, and you should be able to access them online. You must now pay the filing fee between $10 and $100.
Next, you’ll have to wait a few days to four weeks to determine if your application was approved. If your application is approved, you may be required to place an ad in a local newspaper.
how to form an LLC
Forming an LLC is slightly more complicated than registering a DBA.
Create your LLC in the state where you intend to operate your business. You must choose an LLC name that is both available and legal in your state. Although each state has its own set of requirements, the majority of them include the following:
- The words “LLC” or “Limited Liability Company” must appear in your company name.
- You must choose a business name that is not already registered as a business entity in your state.
- You may not use words or acronyms such as FBI, NSA, Homeland Security, or any other text that could be misinterpreted as standing for a government organization.
Choose a registered agent, a person, or a company that sends and receives legal documents on your behalf. You can designate yourself in some states.
After naming a registered agent, you must complete all the documentation required to register your LLC in your state.
These documents include your Articles of Organization and Certificate of Incorporation, which may usually be accessed on your state government’s website. You may also require state-mandated forms, such as a business license or an Employer Identification Number EIN.
Finally, you must pay your state’s filing fee before starting a business. You should pay between $100 and $800, depending on your state.
which is better for me: a DBA or an LLC?
Now that you understand the differences between a DBA and an LLC, consider some specific instances in which one may be more valuable than the other.
when is a DBA good for you?
Whether you wish to rebrand, localize, or extend your existing firm, a DBA is a good option.
For example, if you own a pet-sitting business and want to start selling pet clothes and accessories, a DBA will allow you to do so under a more appropriate name.
A DBA is also beneficial if you want to keep your real identity hidden. For example, you could employ a DBA if you’re creating a blog and online business that evaluates local restaurants.
If you photograph high school seniors in nearby cities, you can use DBAs to hyper-localize your business and improve your marketing. You could, for example, set up multiple DBAs such as “Epic Senior Pictures – Raleigh” and “Epic Senior Pictures – Durham.”
when an LLc is the best option
An LLC is always the best option if your company constantly expands and earns money. Creating a legal business entity will protect your funds and make obtaining a business bank account or loan easier.
Specific risky business industries may also benefit from an LLC. For example, if you want to start your own business as a licensed caregiver, you should form an LLC to protect your personal assets. If a customer fell and their family blamed you for their injuries, an LLC would protect your assets if the matter went to court.
how Countick can assist
Regardless of the structure of your business, accurate and complete bookkeeping is the foundation of a stress-free tax season. Countick completes and reviews your monthly bookkeeping, providing you with up-to-date and accurate information on your company’s financial health.
When tax season arrives, a CPA or Tax professional will use your Countick-generated financial data to file your return. Do you need a tax solution? The Countick will file your paperwork as part of your subscription plan. Find out more by visiting our Services page.
in conclusion
While an LLC is often your best bet for business and personal asset protection, DBAs also have their uses. They are less expensive to set up, serve as practical branding tools, and are less likely to break the bank for budget-conscious enterprises.
