Fact checked for accuracy by Billie Anne Grigg, a bookkeeper and Mastery Level Certified Profit First Professional.
Starting a business is one of the most exciting things a person can do. To be successful, entrepreneurs must go about the process correctly, which often starts with incorporation.
Incorporation simply means going through the legal means to officially establish a business, which the government then recognizes as a separate entity from the owners or proprietors. To do so, you must know what type of business structure you need, as this decision will have enormous legal and tax implications for the life of the company.
A common question that a lot of new entrepreneurs ask is whether to establish a DBA or LLC, but we’re here to tell you that this is likely not an “either or” decision. DBAs are significantly different from LLCs and don’t offer liability protection and many other benefits that LLCs bring to the table. Let’s dive into all of the details.
What Is a DBA?
DBA stands for “Doing Business As.” The most important thing to know about DBAs is that they are not legally incorporated businesses, and they do not carry the same protections for the business as other entities.
There are a few circumstances under which you might want to set up a DBA, and incidentally, they happen on opposite ends of the corporate spectrum. The first is if you’re just starting up and in the very early days of getting established. You may not have a clear idea yet of the direction in which the business will go, but you want to conduct business under a name other than your own.
And that is exactly what a DBA does: it allows proprietors to do business under a business or brand name legally. It’s especially useful in startups with partnerships because those partners don’t have to worry about whose name to use for legal transactions.
On the other hand, established and successful companies sometimes need to utilize a DBA. When an established business wants to get into a new market or branch off into another direction, they often set up a DBA to legally operate using a different name. Doing so allows them to re-brand or otherwise separate themselves from the parent company, at least in the public’s eyes.
What Is an LLC?
The most significant difference between a DBA and an LLC, or Limited Liability Company, is that LLCs are legal entities recognized by local, state, and federal governments as incorporated companies. This status provides essential protections for proprietors. While you can and will be held legally responsible for the company’s actions in terms of criminality and ethics, your assets are protected from lawsuit settlements, bankruptcy, and seizure.
An LLC is relatively simple to set up and is the preferred entity of many entrepreneurs. Since it is simple, the legal costs are also relatively low, making it an excellent option for startups.
LLCs are also very flexible. Business owners can establish them as sole proprietorships or multi-member organizations and change ownership over time. They also provide the option to either pay taxes as a business (similar to either c corporations or s corporations) or avoid business taxes altogether by paying through income taxes.
Related reading: Pros and cons of LLCs
Finally, it is important to note that an LLC can convert to a corporation or other type of company later on, so growth is not an issue. Many entrepreneurs begin as an LLC and then make further decisions later on as the business itself demands.
Similarities Between DBAs and LLCs
There aren’t many similarities between DBAs and LLCs, but they do have a couple of commonalities. Both establish a separate legal name for the business. An LLC offers more legal protection than a DBA, but both allow you to legally conduct business under a company name that is separate from your personal name.
And that’s about where the similarities end.
Another fact worth noting about the relationship between DBAs and LLCs is that an LLC can establish and run a DBA. Owners do not need to add a DBA in their names if they already have an existing LLC (although they may choose to).
Advantages of Setting Up a DBA
For entrepreneurs just starting out who want to run as a sole proprietorship, one of the most distinct advantages of establishing a DBA is running the business under an “official” name that is different from your own. You’ll also save some dollars if you’re comfortable running as a sole proprietor with a DBA vs. establishing an LLC; DBAs cost significantly less money to establish. Actual fees vary from state to state, but you’ll rarely encounter a situation in which a DBA costs more.
Another advantage of setting up a DBA is if you already have an LLC or other legal company and you want to change the company name you operate under, you don’t need to go through the process of establishing another LLC – you can just register a DBA. That can represent significant financial savings as well as greatly simplify taxes, legal obligations, and more.
Aside from the two situations discussed above–very new companies and established businesses looking to market and brand separately–DBAs also have major advantages for franchises. Franchise owners can establish an LLC or other company under one name and then a DBA to run their business as the franchise name itself.
For example, “John Doe, LLC doing business as Subway.” This is especially advantageous if you plan to open more than one franchise. But again, you would more than likely want to establish a separate LLC first.
Sole Proprietorship (with a DBA) vs. an LLC: Why an LLC Is Likely Your Best Option
Overall, an LLC is the best option for most startups and other new businesses for several reasons. The biggest reason is undoubtedly to protect the business owner or owners.
If someone decides to bring legal action against an LLC, the proprietors’ personal assets–homes, cars, investments, and other property – are not endangered. While you probably don’t want to consider the possibility that your business could fail, it can also protect the owners’ property from being seized or jeopardized because of bankruptcy or debt.
Bear in mind that establishing an LLC will not protect your property if the government can establish that it was purchased with ill-gotten gains. That’s why it is so important to understand all laws and regulations governing your industry, and to hire an experienced, competent accountant to help you navigate tax code.
In addition to providing some protection for the owner’s private property, establishing an LLC now can save time and money in the future. If you plan to grow your business (and what decent entrepreneur doesn’t?), then you will almost certainly need an LLC (or another type of formal incorporation) at some point. You might as well set it up now using an LLC service and go through this legal process only once.
The Last Word
Establishing an LLC also gives your business a certain degree of credibility that a DBA simply does not carry. This factor is especially important if you plan to seek investors, either now or sometime in the future. They will certainly want to ensure that you and your business are sound and credible, and an LLC is a much smarter investment than an individual who is “doing business as” a non-incorporated entity.
Filed under: Advice Columns