Every entrepreneur wants a perfect business name without getting in the next list of “10 Most Ridiculous Business Names.” Let’s say after an exhausting brainstorming session, you came up with a really smart name. Now, how will you use it? Will it just be a fictitious name or should you form an LLC to register it? That’s one tough question, especially if you are a one-member business. You can register a Doing Business As (DBA) name or form a Limited Liability Company (LLC). But which one should you choose?
The best way to figure this out is to understand all the differences and common things between DBAs and LLCs. You will then know how each suits your business goals.
At the initial stage of business, most entrepreneurs usually use only one type of economic activity. But in the future, the need to diversify risks and expand the company arises. This is when you have to make a choice: open a new legal entity or apply “Doing Business As”?
What are DBAs and how they differ from LLCs? This comprehensive guide will help you gain the necessary insights, as we share everything you should know to make an informed decision. Read on!
Quick Tip: If you would like to form an LLC and are searching for a reliable service to deal with all the necessary business paperwork, you might want to see our list of the best LLC formation services. It contains a detailed review and comparison of the most popular services like ZenBusiness or LegalZoom.
What Is a DBA?
The first thing to remember is that a DBA is not a business entity, like an LLC or a corporation. Thus, by registering one, you will not officially form a business. In fact, a DBA is a registered fictitious business name that you can officially use in your legal business documents and 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. There are a few other DBA applications, as well.
For example, say, a large established business has released a brand new product line, different from their main production, for a different target market. The company might want to release this new product line under a separate name – that’s when a DBA enters the game. Establishing an additional brand while connecting the product back to the main business, e.g., “Product A is brought to you by Company B” is the way to go. And there’s no need to form a separate LLC or a subsidiary company – you can avoid all the hassle by simply using a fictional name in an official position.
Registering a DBA provides an ability to change the business image or introduce a new promotion strategy prior to forming a whole new business entity.
A DBA is typically used by entrepreneurs in the following cases:
- Increasing confidentiality – if you simply don’t want to conduct business under an official name for any reason;
- Marketing purposes – when you want to introduce a new product to the market;
- Accounting purposes – when starting a new business line, there can be a necessity to separate several types of business activity;
- Opening a separate bank account for a new business, etc.
Creating multiple DBAs for a separate type of business makes no sense, and there’s no limit on the number of DBAs in an LLC. However, the greater the number of additional names, the more difficult it is to do all the bookkeeping correctly.
Keep in mind that the registration of a DBA is not identical to the creation of a new legal entity. Therefore, its presence does not guarantee the protection of assets like a new LLC.
Many LLCs want to add a different name to an existing company. Adding a DBA to your organization can offer both more attractive marketing options and a favorable angle for your business. It’s a beneficial addition you can make on your own or hire appropriate service providers.
What Is an LLC?
As you’ve learned by now, an LLC is nothing like a DBA. A limited liability company is a legal business entity that involved a far more serious organizational structure than you can find in a sole proprietorship or a general partnership. Moreover, an LLC is much easier to set up when compared to a corporation, plus, and you don’t need to continuously maintain it either.
“Limited liability” in the name implies that such a company protects the personal assets of LLC owners. Thus, in case of a lawsuit against your company, the LLC business structure provides an extra layer of protection for you as an owner. This is how you can secure your personal assets, including your vehicle, house, and personal bank account.
LLC is a versatile, cost-effective, and quite flexible business entity type. You can also choose from a couple of formation, management, and taxation options, too. For example, such a company can be managed by a single person, i.e. as a single-member LLC, or by a group of owners, as a multi-member LLC. The owners/members/organizers can either manage the company on their own or hire outside managers.
Some of you may already know that LLCs are known as “pass-through” entities. This means they don’t pay taxes themselves, however, owners must report business income on their personal tax returns. But this is also flexible. If you want, you can choose a special tax status for your LLC, meaning that you can have it taxed as a C corporation or an S corporation to best fit your company’s financial situation. Keep in mind that after filing Articles of Incorporation in your state, you will be designated as a C corporation by default. You will have to file Form 2553 to get an S corporation status. C corporations are taxed twice (corporate income taxes and federal income taxes). S corporations can avoid corporate taxes.
DBA & LLC Similarities
As you’ve probably learned by now, DBAs and LLCs are quite different. However, they both allow you, as an owner, to use something other than your own individual legal name. You can also perform banking under your business’ name instead of your personal name.
A few more similarities refer to registration and maintenance fees. Thus, an LLC is required to pay fees to file the Articles of Organization and (often) annual reports. A DBA in turn has to pay registration and renewal fees. The fees and regulations, as always, depend on the formation state.
If you’re a small business with limited time and money, a DBA could be more beneficial for obvious reasons – getting a DBA is cheaper and quicker than forming an LLC. You may only need a few minutes to complete the application process for a DBA. Plus, no matter which state you’re in, DBA fees are almost always cheaper than those of an LLC. Additionally, while you will have to renew your DBA occasionally, the LLC has more serious annual reports and additional maintenance that can negatively affect your annual budget.
With that said, using a DBA makes sense when several business activities should be separated. It will allow you to better assess the efficiency and improve the quality of control over individual activities. A DBA can also help you promote a new product line to the market and better analyze consumer reactions, without having to spend money on forming a new legal entity.
Do you need a DBA in your LLC?
If you have an LLC and want to file a DBA, you don’t have to choose between one or the other – you can add a DBA to your LLC. As mentioned earlier, a DBA is a good idea if your existing LLC wants to operate under a name other than the legal company name. This process is often referred to as a “fictitious business name.”
How do you add a DBA to an LLC?
Choose a name for your DBA and think of a few additional alternative names. In case another company has already taken/registered your chosen name, you will need to have another name on standby.
Fictitious Business Name Registration is a simple process that involves completing the filing requirements for DBAs in your state. Some states require that you go through the Secretary of State’s office to file your registration materials. Other states allow DBA registration through the office of accredited agents.
1. Hire an LLC formation service (e.g. LegalZoom), ask them to run an entity name search on your chosen name. This search will scan all business registrations in your state, and if your chosen company name is already taken, you will be asked to submit your alternate names until they find an available one.
2. Request a DBA form from the state and file with your chosen DBA name, LLC official name, your name, and address, and your legal address. Sign and date the form before submitting (along with the required fee for your DBA filing). The DBA is active and fully valid for several years (four to five years) before you have to renew it.
A DBA and LLC is a simple option that allows you to open new doors for your business. If you are a small business, getting a DBA can help you keep your private and business expenses separate during the tax filing season.
If you plan to add new business activities to your company, there’s a number of peculiarities to consider:
- Proof of good standing may be required to register a DBA for an LLC – such a certificate is issued by the Secretary of State;
- DBA LLCs cannot use “Corp.”, “Inc.” and similar terms in suffixes;
- Doing business using an unregistered DBA is prohibited by state law; penalties range from fines to criminal liability;
- Processing time to add a DBA varies from state to state;
- Many states do not limit the time period for a DBA, however, most of them will require a periodic renewal (usually, every 5 years);
- Most states require a new DBA registration in case of significant changes in the legal entity (e.g. different legal address, management, members, etc.).
If the state does not accept DBA applications, they must be filed in each U.S. county where the LLC plans to do business (additional registration fees will be charged for each separate application).
To make a long story short, let’s just focus on the main advantages of an LLC, e.g. personal asset protection. Unlike a DBA, an LLC is a separate legal entity from its owner(s). As mentioned earlier, LLC allows you, as an owner, to keep your business and personal assets separate. This protects your personal assets in the case of any lawsuit against your company.
The most interesting thing about an LLC, when compared to a DBA, is that after you register your company’s name with the state, no one else can use it. Now, the funny thing is that in some states, a DBA name, even when officially registered, will not provide the same security. This means that if any other business breaks in and reserves/registers your DBA name, you will not be able to use it anymore. How do you like that?
Room for growth and expansion. An LLC allows you to hire employees, cooperate with your partners, and foreign-qualify your LLC beyond your home state. Now, a DBA does not change the actual structure of your business – it simply gives you an alternative name.
Now you know that DBA names are only useful in certain cases. Considering the fact that it lacks exclusivity, an LLC is definitely a winner here. Yes, LLCs will cost you a little more and are somewhat more demanding in terms of maintenance and paperwork, but a DBA doesn’t even add any unique rights to your business name in the state. Think of all that exhausting brainstorming and registering a great DBA name only to watch some other business taking it from you.
So, if we were you, we’d rather form an LLC to secure that perfect chosen name of yours, achieve personal asset protection, and focus on success.