What is the difference between a DBA and LLC?

A limited liability company (LLC) is a business entity that provides asset protection. A Limited Liability Company (LLC) is a hybrid business structure that has characteristics of a sole proprietorship, general partnership, and corporation. It has the tax advantages of the non-corporation entities and limited liability protection of corporations. Depending on the state, you will be required to have an Operating Agreement that delineates some key aspects of the business. An LLC can get a tax identification number, open a bank account, and perform business under its own name.

In comparison, “doing business as” (DBA) means that the same company is operating under a new name. A DBA isn’t a a business structure and will not protect your personal assets against lawsuits or creditors.

Here are things to consider with a DBA:

  1. Naming and branding - A DBA allows sole proprietorships to operate under a name different from the owner’s legal name, which can make the company appear more professional. Example: Your business’s name would be “Kevin Johnson” if your name is “Kevin Johnson” unless you get a DBA.
  2. Personal protection - DBA’s do not protect your personal assets (like your car, house, savings) if your business is sued. If you are concerned about this risk, an LLC will offer you asset protection and be the better route.
  3. Banking - DBA’s are not required to have a separate bank account, and you can have one bank account with multiple DBAs. Although it’s not recommended, some business owners may find that it is the best decision for them. If you must have one bank account with multiple DBAs, keep the following in mind:
  4. Place payment instructions and terms on the payment quote in case customers need to recall the account number for better tracking purposes.
  5. Create an organized sales ledger that carefully tracks the income of each DBA.
  6. Keep detailed records in a cash book.

Overall, you should have a reliable bookkeeping process if you are audited or sued because you will need to retrieve information in an organized way. Otherwise, you might be left paying more in taxes or liabilities than you would have with more than one bank account setup.

DBAs can also be useful when a company wants to introduce a new product or line of business under a different name, but doesn’t want to create a new legal entity.

Example: Kevin’s Bakery LLC decides to open up a coffee shop called Kevin’s Morning Coffee. At that point, you can open Kevin’s Morning Coffee and register a DBA for the name. However, these informal businesses really should have organized as a formal business structure as an LLC. This way, you’ll have all of the benefits above as well as personal asset protection.

Do you need an EIN for a DBA?

DBAs are your business nicknames, and therefore, you don’t need to have a separate EIN. To read more details about an EIN for your DBA you can go here.

Not all businesses need an EIN. Whether you’re required to have one depends on how your business is organized and what kind of taxes it pays.

Do you need an EIN? Check out the 4 ways you can apply for an EIN.

How to file a DBA

The DBA filing process differs from state to state. To learn how to form a DBA in your state, check out these state-specific guides. You can also read this list of the best DBA filing services.

What are the benefits and disadvantages of forming an LLC?

There are many advantages to an LLC compared to other business entities:

  • Legal protection - Compared to a sole proprietorship or partnership, an LLC will protect your personal assets and also shield you against being personally responsible for the LLC’s debts or lawsuits.
  • Credibility - An LLC is recognized by partners, suppliers, and lenders as more favorable. The business name will let customers take your business more seriously.
  • Simplicity - LLCs require less paperwork and formal meetings, roles, and record-keeping procedures compared to corporations.

The downsides to LLCs:

  • Taxation - If an LLC is taxed as a pass-through entity, individual owners will need to pay taxes on their share of the profit and loss regardless of whether they received a cash disbursement from the company. This may cause an undue cash flow burden on the owners.
  • Maintenance Costs - Every year, an LLC will normally need to pay an annual fee to maintain the company status. This increases the cost of having an LLC.

Even though there are disadvantages, the benefits far outweigh the costs. If you have a sole proprietorship this is the most ideal business structure.

When should you form an LLC?

First, let’s talk about when it’s not the right time to form an LLC.

When Should You Not Form an LLC?

  1. You aren’t selling any products or services now or in the foreseeable future.
  2. You’re just testing the waters and seeing what services or products might be a viable business to pursue.
  3. You don’t have any clients or customers built up.
  4. Your company isn’t visible, online or offline.

When Should You Form an LLC

  1. You are selling your product or service on the regular.
  2. You have regular and repeat clients or customers.
  3. You would like your business to have its own liabilities, assets, and ability to open business bank accounts, separate from your personal accounts.
  4. You are hiring independent contractors or employees.
  5. You’re starting a business with more than one person. By default, this is a partnership, but with an LLC, you both (if there are more than two, you all) become ‘members’ of the LLC protecting your ownership and longevity of the business.

How do I form an LLC? Note that this is a general list of the items you’ll need to form your LLC, but it’s important to do your research and check the state website first as all have different requirements.

  1. Find your location
  2. Name your LLC
  3. Choose a registered agent service
  4. File Articles of Organization
  5. Prepare an Operating Agreement
  6. Apply for a Federal Tax ID (FEIN)

You can find these ultimate guides: