You need a business name, and a good one. You certainly don’t want to see your company show up on Huffpost’s next list of “25 Most Ridiculous Business Names.” So, you sit down at your desk, brainstorm, and come up with something truly clever. Now comes the tough question: do you use it to create a fictitious name, or should you register it by forming an LLC?
You have a couple of options here. For one, you could register a Doing Business As (DBA) name. On the other hand, you could go all the way and form a limited liability company (LLC). It’s not always easy to determine which is the best option, especially when you’re a one-person business.
The best way to decide is to lay out all the similarities and differences between DBAs and LLCs, then see how each fits with your grand business plan. This guide is a perfect jumping-off point, as we’ll outline everything you need to know to make an informed decision. Let’s get started!
What Is a DBA?
First things first: a Doing Business As (DBA) is NOT a business entity, like a limited liability company or a corporation. Registering one will not officially form a business. Rather, a DBA is a registered fictitious business name that you can legally use on official business paperwork, transactions, etc. Sole Proprietorships and general partnerships often acquire DBAs so that they can use a real business name instead of the owner’s personal name. This isn’t a DBA’s only application, though.
Here’s an example: a large, established business is releasing a new product line with a different target market than their flagship product. This company might want to brand that product line under a separate name, and a DBA will do the trick. They can establish a separate brand while tying the product back to the main business – for example, “Product A, brought to you by Company B.” This is much more convenient than forming a separate LLC or a corporate subsidiary, and the name can still be used in an official capacity.
No matter why you want to register a DBA, its big selling point is the ability to change the image of a business or introduce a new advertising strategy forming an entirely new business entity.
What Is an LLC?
Unlike a DBA, a limited liability company is a legal business entity with significantly more organization than you’ll typically see from an unincorporated business like a sole proprietorship or a general partnership. Compared to a corporation, the LLC is much easier to set up, and it doesn’t require a ton of ongoing maintenance either.
As the name implies, a limited liability company limits the owners’ liability. In other words, it protects their personal assets. If there’s a judgment against your business in a lawsuit, or if you reach a settlement, the LLC business structure adds a layer of protection for personal assets like your car, house, and personal bank accounts.
It’s a flexible, versatile business type, with a couple of formation, management, and taxation options. An LLC can be operated by one person ― commonly known as a single-member LLC ― or by an ownership group as a multi-member LLC. The owners/members can either manage the company themselves or they can hire outside managers instead.
When it comes to taxes, LLCs are typically classified as “pass-through” entities, meaning that they don’t pay taxes themselves, but owners must report business income on their personal tax returns. But this, too, is flexible. If you’d prefer, you can elect to have your LLC taxed like a C corporation or an S corporation. This way, you can choose the tax structure that best fits your company’s financial circumstances.
What Are the Similarities Between DBAs and LLCs?
Quite frankly, DBAs and LLCs are pretty dissimilar, but they aren’t polar opposites. Actually, they have a couple of things in common. For example, they both require certain fees to register and maintain. An LLC has fees to file the Articles of Organization and (quite often) annual reports. And the DBA has a registration and renewal fees. The particulars of these fees and regulations, however, depend on your state.
Aside from that, the only significant commonality is that the DBA and LLC both allow you to use an assumed name for your business.
Advantages of the DBA
So, in what situations would a DBA be preferable? If you’re a very small business and short on time and/or money, a DBA could be more viable, as they’re cheaper and quicker than forming an LLC. The application process for a DBA can be completed in just a few minutes, and while the fees vary by state, they’re almost always cheaper than an LLC’s. Furthermore, while you will have to occasionally renew a DBA, the LLC has annual reports and other maintenance that can make a dent in your annual budget.
Advantages of the LLC
Where do we begin? It’s tough for DBA to measure up against LLCs because LLCs offer so many advantages. Most significant, perhaps, is its personal asset protection. Because the LLC is a separate legal entity from its owner(s), whereas the DBA is not, the LLC’s ownership is able to keep their business and personal assets separate. As we mentioned earlier, this can help protect your personal assets in the case of a lawsuit against your LLC.
The LLC even beats the DBA at its own game: naming. When you form an LLC, your company’s name is registered with the state and no other business can use it. A DBA name, while officially registered, does not provide the same exclusivity. If another business swoops in and reserves or registers that name, you won’t be able to use it anymore!
The LLC also leaves far more room for growth and expansion than a DBA. A limited liability company allows you to hire employees, take on partners, and expand into other states. These things aren’t nearly as easy for a sole proprietorship or a general partnership that acquires a Doing Business As name, because the DBA does not change the actual structure of your business. It simply provides an alternate name.
Doing Business As names can be useful, but only in certain, very specific cases. But for our money, an LLC is a much more advantageous option. A DBA name’s lack of exclusivity alone is enough to basically discount it entirely.
Yes, limited liability companies cost a bit more and are somewhat more work-intensive, but a DBA doesn’t even give you the unique rights to your business name in your own state. Imagine dreaming up with a great name and registering it as a DBA, only to watch someone else register it for their own LLC, prohibiting you from using it.
So, if you want our opinion, instead of spending the time and money to apply for a DBA, put it toward forming an LLC. This will lock down that name, give you personal asset protection, and set your business up for prolonged success.