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When starting your own business, an important decision to make is whether you want to remain a sole proprietorship as a DBA or dive straight into an LLC.
Starting your own business but still figuring out your business structure? Here’s everything you need to know about the differences between a DBA and an LLC.
So you’re starting a business and finally chasing that dream.
Now you're swimming in an alphabet soup of all kinds of decisions. You're probably thinking about how you want to market your business to prospective clients. You're researching your competitors and looking for the perfect name to represent your brand.
One of the most challenging choices you make right off the bat is deciding whether you want to remain a sole proprietorship and register your chosen company name as a DBA or dive straight into an LLC. Both options allow you to be professionally recognized, but both have advantages and disadvantages. Every business is different. What works for one might not work for another. You'll want to understand the pros and cons of each option before settling on one.
We're here to break down the differences, show you the advantages, and help guide you toward the right decision that makes sense for your unique business structure.
Let’s take a closer look at DBA vs LLC:
DBA is an acronym for "doing business as". You may hear it referred to as a “fictitious name”, “assumed name”, or “trade name.” To put it simply: It means that you’re conducting business under a name that isn’t your legal name. If you have a sole proprietorship, you’re usually required to use your legal name (“e.g. Barry Business-Owner” as the name of your business. However, a DBA makes it possible to manage a business under a different name (e.g. “Barry’s Famous Ice Cream”) that you register with your local Secretary of State.
A DBA is not considered a separate legal entity and does not typically provide any of the same legal protections as an LLC. However, LLCs, partnerships, and sole proprietors are all qualified candidates for receiving and registering a DBA name.
For example, many franchise business owners opt for a DBA, even if they legally register as an LLC. The LLC name may be Debby’s Cleaning Services LLC, but she operates under a DBA, so her company can legally be marketed as Merry Maids, the franchise she recognizes her business as.
When it comes to tax season: all of the earnings you made from your sole proprietorship and DBA will show up on your personal return. There is no need to file a separate tax return. However, you’ll be subject to regular income taxes and the 15.3% self-employment taxes.
LLC stands for limited liability company. An LLC is treated as a separate entity and is a legal business structure. What makes an LLC a popular choice for businesses is that it protects your personal assets. In certain cases with an LLC you limit your liability with the business.
For example, if a creditor went after your LLC for a recurring debt that hasn’t been paid, they would only be able to go after your company’s assets and not your personal ones. Separating your personal finances from your business ones will give you more peace of mind and help you make mindful business decisions that you and your business can benefit from.
For an LLC, you operate a business under your LLC’s name. You’ll need to set up a business bank account and use your company’s name when creating promotional material or connecting with customers.
When it comes to federal taxes: an LLC is taxed the same way a DBA is. However, it does vary by state, and the state does require different forms for state taxes. You’ll want to familiarize yourself with your state’s unique rules about LLC taxes before getting started. Each member of the LLC is required to report their income from the company on their personal tax returns.
On a federal level, an LLC and a DBA are the same. The major difference between the two is the state-level differences. There may be different fees associated with registering, paperwork, and other nitty-gritty details that you'll want to have a general understanding of before completing the paperwork.
Another big difference between an LLC and a DBA is that an LLC can apply to be taxed as a corporation federally. There are five different legal business structures: sole proprietorship, partnership, s-corp, c-corp, and LLC. Even though an LLC is a legal entity only, it can choose to be taxed as any of the four other structures.
That means they don't necessarily need to file taxes as a pass-through entity if it doesn't make sense for the business because an LLC can choose to file its taxes as a c-corp. This can bring significant tax savings depending on the business's income, and you should consider meeting with an advisor to see if this is the right decision for you. Many businesses choose to make the switch when they see a consistent increase in profits and are scaling their business.
This option makes more sense for businesses that outgrow their current business structure. For example, if you're a small business or freelancer that started as a sole proprietor and then decided to get a DBA to appeal to a larger audience. After a while, you may want to hire an employee or two or start marketing your services, so that’s when you may switch to an LLC.
One of the biggest differences between an LLC and a DBA is that an LLC limits your personal liability and protects your personal assets. A DBA does not provide that type of financial protection. So does that mean an LLC is better than a DBA? Not necessarily,a DBA is much easier to maintain and less expensive than filing as an LLC. A sole proprietorship with a DBA is a great first step for smaller businesses looking to get their feet wet. It’s a great option for lower profit and risk business structures since a sole proprietorship doesn't provide protection to any of your personal assets without an LLC.
With a DBA, you can develop your own brand identity, and you don't need to worry about displaying your personal name for the whole world to see. Once you register your DBA, you can legally use the name on your website, business cards, and any promotional materials you create. This will allow your customers to grow a stronger relationship with your brand and help you build a community.
A DBA allows you to open your own business bank account and collect payment using a name that isn’t your own. This will help you separate your personal and business finances, making tax season hassle-free.
The cost for registering as a DBA depends on the state you and your business reside in. However, you only need to pay around $10-$25 for registration fees. Some states require a renewal fee every year or two, but these fees won't break the bank or become overbearing.
The registration process is straightforward, even though the process varies by state. You can expect to have everything wrapped up in just a few weeks. However it’s important to keep in mind that just because you complete the registration process, doesn’t mean you have all of the legal trademark rights to that name. It only means you have the legal right to operate under that name.
A DBA allows someone with a sole proprietorship to keep their personal information private. Even though individuals can find your name under a public record, there is still an extra layer of protection for the individual if they don't want their personal name to be part of their business name.
With an LLC, you can create separate legal entities. This makes the LLC responsible for all debts and liabilities, not the individual. Provided you follow certain rules in most cases, even if you own the company, you won’t need to worry about debt, law issues, or bankruptcy falling on the individual. This financial protection is important for businesses with a higher profit and relatively more risk.
With an LLC, you get to legally claim your business name of choice in the state you live in. Keep in mind: you’ll need to register your business name with the United States Trademark and Patent office if you want your name to be recognized on a national level.
An LLC is a step up from a sole proprietorship or partnership. When customers or potential prospects find out your business is an LLC, they’ll know you mean business and are more likely to take you seriously. This can inevitably build on your legitimacy and credibility.
An LLC provides more flexibility than other options when filing your taxes. Single Member LLCs, like sole proprietorships by default file their taxes on a federal Schedule C. This means your profits and losses are listed on a separate schedule attached to your federal tax return. But this saves you the additional cost of having to prepare a separate federal corporate tax return. As an LLC, you can also choose to file as an S-Corp. Income from an S-Corp will pass through to the individual’s tax return and is taxed at the personal tax rate. With pass-through taxation, you don’t need to worry about the corporation paying any federal corporate income tax and can avoid double taxation. However, you’ll still pay income tax on your personal income. S-Corp taxation is outside the scope of this article but nonetheless, we need to mention the flexibility.
To file for a DBA, you’ll need to start by checking if your business name of choice is available. If it is, you can reserve that business name with your state, pay your application fees, and then register your DBA for your small business in your state. Every state is different, and so are the rules and regulations.
You’ll want to look at your unique local requirements to ensure you correctly follow all necessary registration steps. Keep in mind: Before you can legally conduct business under your DBA name, you’ll need to complete all local requirements and registration forms with your state. The rules for registering your DBA also vary by the state after you register. For example, California requires you to market or publicly advertise your DBA within the first 30 days of completing the registration process.
The good news is that the paperwork for a DBA is relatively simple. You’ll only need to file a few pages, and the process is usually all online. You can expect to pay a one-time fee of anywhere between $10 to $100. The price may vary depending on what state you live in. You may also need to pay renewal fees for a DBA every year.
In California, you will need to pay the state $26 to file your application and an additional $5 to search the business name database to see if your name is available. You can expect to pay that $26 every year when you renew your DBA in California.
The requirements and costs associated with registering an LLC also depend on your state. To register an LLC, you’ll need to have the following documents filed with a local secretary of state:
Depending on your state, you may also need an operating agreement or a statement of information document. You’ll also need to choose a business name, apply for your permit, and appoint a registered agent. A registered agent is someone who will receive any legal documents on your behalf. In some states, you can designate yourself as your own registered agent. There are also third party companies to look into that offer these services for LLCs, where they will do all the legwork for you for a fee.
You'll need to complete all required paperwork and file for an LLC in your state, and you’ll also need to get a business license or an Employer Identification Number (EIN).
Lastly, you’ll need to pay the state filing fee. You can expect to pay around $100-$800 every year during tax season.
In California, you can expect to pay $70 to file an article of organization with the Secretary of State's office and a $20 fee to file a statement of information. Every year during tax season, you'll need to pay an $800 tax.
The rules for an LLC vary by state. However, most include:
We'll let you in on a secret: There is no right or wrong way of doing things, especially when you're just starting. Choosing to start your journey as a sole proprietorship with a DBA so you can have more flexibility with your business is just as good of a choice as starting your own LLC.
Being a sole proprietorship is the most basic, straightforward starting point for most businesses. Especially while you’re still learning the ropes of being your own boss, a sole proprietorship often makes the most sense. As your business begins to expand and grow, where you go from there depends on you and your individual plans.
When you’re just starting, you’ll want to take things slow and weigh out your options.
It’s important to note that you don’t need to have an LLC and a DBA unless it makes sense for you and your business. The DBA is usually only necessary if you're looking to get more creative with your brand name, if you're a franchise owner, or if you're looking for a way to localize your business name to reach a new audience.
Keep in mind that what you start out with may not be the right option later down the line. Businesses grow and change in structure over time. Be mindful of the growing pains and enjoy the journey of owning your own business.
If it makes sense for you: You can rest assured knowing you can go from being a sole proprietor with a DBA to a sole proprietor with an LLC.
You may be wondering: Is a DBA or LLC better? Unfortunately, we don’t have a straight answer for that. But the good news is: that you can have both a DBA and an LLC. If you want to use a different business name than your LLC, having both may be the better option.
However, if you want financial protection, you can stick with an LLC. An LLC structure provides a sense of security for businesses. If an individual were to fall and break their leg at your storefront, in many cases, they wouldn't be able to sue you or any of your personal assets. However with an LLC, If your business falls into debts, or someone suspects you're conducting fraud of any kind: the individual is usually protected.
With a DBA, your personal assets aren’t protectedfrom these scenarios, but none of these may apply to you. A sole proprietor can dive right in, get their hands dirty, and start working. You don't need to worry about management structures, extra fees for filing your tax return, or any additional state-related paperwork. It's also a great option if you're only looking to sustain what you're currently doing for work and aren't interested in growing your team or business too big.
Remember: You don’t need to choose between the two right away, and you can choose to operate your business however you see fit. Every business needs to start somewhere, but that doesn't mean that's where they need to stay.
According to a 2018 NSBA report, 37% of small businesses described themselves as an LLC business structure, and only 12% are sole proprietorships. Even with those numbers in mind: There is no standard yes or no answer for which option is right for you and your business.
Forming a legal business entity can protect your money and help you get a business bank account. However, creating and maintaining an LLC can be more expensive than registering a DBA. These options also require more paperwork and upkeep, but for some: the advantages far outweigh the disadvantages.
Again, every business is different. If you aren't sure which option is right for you and your business, you'll want to meet with a trusted advisor to plan a tax roadmap that aligns with your current and future goals.
If you’re unsure which step is right for you, you can lean on the team at LedgerFi. We will help you decide if a DBA or LLC is better for your current and future goals. So you can find the best business structure for you and your business needs. Our team of tax professionals will help you weigh out the pros and cons of a DBA vs LLC, and find the best possible solution for you.
Every business is different, and so are the taxes associated with it. We’ll give it to you as it is, provide you with a personal plan, and help you establish your business in a way that makes sense for you. We'll help guide you to make the most beneficial choice for your business, so you can have peace of mind when tax season rolls around.
Ready to get started? Contact us today.
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