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The business world is full of LLC Vs DBA acronyms and abbreviations, and two of the most common are Limited Liability Company (LLC) and Doing Business As (DBA).
LLCs offer liability protection for their owners, while DBAs don’t. So, which one is right for you if you are just starting a business? The answer depends on several factors, including the size and type of your business, liability tolerance, and the amount of paperwork you’re willing to deal with.
In this article, we’ll look at the pros and cons of LLCs and DBAs to help you make the best decision for your business.
What is an LLC?
An LLC, or Limited Liability Company, is a type of business entity that offers little liability protection to its owners. Limited liability means the owners’ assets are not at risk if the business is sued or incurs debts. This protects the owner’s finances from being seized in the event of a lawsuit against the company.
LLCs are relatively easy and inexpensive to set up and offer flexibility in how the business is structured and taxed.
Pros of an LLC:
- Personal liability protection:
As mentioned above, one of the most significant advantages of an LLC is that it offers personal liability protection to its owners. This means that the owners of an LLC are not personally liable for the debts and liabilities of the LLC. This can be a significant advantage if your business is sued or incurs debts.
- Pass-through taxation:
LLCs are “pass-through” entities, which means that the LLC itself is not taxed on its income. Instead, the LLC’s income (or loss) “passes through” to the owners and is taxed at their individual tax rates. This is the default tax treatment of LLCs. There’s nothing special you need to do for your LLC to have pass-through taxation.
- Flexibility:
LLCs also offer flexibility regarding how they are structured and operated. For example, LLCs can be managed by their owners (known as “Member-managed” LLCs) or by a group of managers (known as “Manager-managed” LLCs). This flexibility can be a helpful advantage if you want more control over running your business.
Cons of an LLC:
To be frank, there aren’t major disadvantages of an LLC.
However, if you’re comparing an LLC to a Sole Proprietorship or a General Partnership, then yes, one could argue that an LLC is more expensive because there is a state filing fee. But Sole Proprietorships and General Partnerships offer zero liability protection. So is the filing fee really a “con”? I don’t think so.
And sure, the Members of an LLC are responsible for paying self-employment tax on the company’s profits. And an S-Corporation can reduce some of those taxes. But that’s also not a con, since an LLC (with established revenue and profits) can elect to be taxed as an S-Corporation and can then get that same tax treatment. So again, how LLCs are taxed is also not a con.
And while there may be other fees for forming an LLC, like hiring a registered agent, paying filing fees, or LLC annual fees. You’d still have to hire a registered agent and file an annual report if you were forming a Corporation. So again, not really a con if you ask me.
For these reasons – and more – the LLC is the most common business structure used in the United States. It offers liability protection for its owners while letting them decide how they’d like the LLC to be taxed.
What is a DBA?
A DBA, or “Doing Business As,” is a name that a business uses for itself that is different from its legal name. For example, if your company’s legal name is “John Smith, Inc.,” you might do business under the name “Smith Plumbing.”
DBAs are also sometimes called Fictitious Names or Trade Names, it just depends on the state in which they’re registered.
DBAs are not separate legal entities from the businesses they represent, so they don’t offer any legal protections. However, they can be helpful for companies that want to operate under a name different from their legal name.
Having said that, if you have an LLC that owns a DBA, the LLC still offers liability protection. So the fact that the DBA doesn’t offer liability protection on its own doesn’t matter. It’s just important to note, that technically, a DBA on its own offers no liability protection.
Pros of a DBA:
- Low cost:
A positive of DBAs is that they are relatively affordable to register. For example, most states only require you to file a simple form and pay a small filing fee, like $10 to $25. And, unlike LLCs, you don’t have to file annual reports for a DBA. However, depending on the state where the DBA is registered, you may have to renew your DBA and pay annual fees.
- Ease of creation:
Another advantage of a DBA is that they are relatively easy to create. In most cases, all you need to do is file a simple form with your state government. This can be a significant advantage if you start a business on a shoestring budget.
Cons of a DBA:
- Limited liability protection:
A DBA’s most significant disadvantage is that it offers no personal liability protection to its owners. This means that the owners of a DBA are personally liable for the debts and liabilities of the DBA (assuming the DBA is owed by a person or persons, and not a company, like an LLC).
So if a DBA is owned by a Sole Proprietorship (informal business with 1 owner) or a General Partnership (information business with 2 or more owners), the business owners are personally responsible if the business ever gets sued.
- Confusion:
DBAs can be confusing for people to understand. Many people think the DBA is a business on its own. But it’s not. It’s simply a nickname that is owned by a business entity (like an LLC or Corporation) or owned by a person or persons (like a Sole Proprietorship or General Partnership).
The DBA is “fictitious” (hence why they are sometimes called Fictitious Names), meaning, it doesn’t have any rights on its own and it’s not a stand-alone company. Again, it’s just a nickname for a person or a business entity.
If you have an LLC or Corporation and you’re just going to do business under the company’s name, you don’t need a DBA Name.
So, which is Suitable for Your Business?
In summary, the argument isn’t really LLC vs DBA, but there are two subtle arguments underneath.
1. LLC vs Sole Proprietorship or Partnership (with a DBA). In this case, the LLC (with or without a DBA) is the clear winner. This is because the LLC has liability protection and the Sole Proprietorship or General Partnership doesn’t.
2. LLC (without a DBA) vs LLC (with a DBA). In this case, there isn’t really a pro and con, since under the surface, they are both LLCs. You can get a DBA if you want to operate under a different name besides your LLC name, but you don’t have to.
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