Business terminology and industry-specific abbreviations could get pretty confusing, especially for first-time owners. The case of DBAs, however, is fairly straightforward, particularly in how they relate to LLCs and similar entities. The fundamental difference between the two concepts lies in their classifications—one is a legally recognized body, the other is more of a tool that could be applied to various entities.Do you want to know all the differences between a DBA and an LLC? Continue reading our article to find out more.
Definition of DBA and LLC
What is an LLC?
An LLC, or limited liability company, is a type of business structure. Just like any other form of business, whether it’s partnerships, proprietorships, or corporations, an LLC is an entirely separate entity in its own rights.
Once created, an LLC is initially tied to a specific location based on the place of registration, classifying it as a domestic entity whose members are protected by its limited liability structure, sometimes called “the corporate veil”. When an LLC ventures beyond its filing state’s borders, it becomes a foreign entity in these jurisdictions, which can sometimes limit its naming options.
To create an LLC, the initial owners/members must go through the formation process with the agency that handles these procedures in their jurisdictions, typically the Secretary of State or in some cases, another registrar.
After that, the entity will be authorized to operate in that state using the name that features in its formation paperwork. In most cases, you will likely need to run all potential names through your state’s availability search to ensure they aren’t already in use, otherwise, your application might get rejected.
What is a DBA?
A DBA, or “doing business as,” on the other hand, is an assumed name assigned to entities or individuals. It does not constitute a separate entity but can be used as a legal name for a self-employed entrepreneur or a business entity instead of its registered name.
This is something an LLC can use to work in certain jurisdictions where it otherwise couldn’t due to limitations related to its original name, or if the owner simply needs to separate specific operations the company carries out based on their type or industry involvement.
Be aware that independent entrepreneurs that choose to use a DBA instead of their personal name won’t have personal liability protections simply because DBA is not a business structure. Still, it can be used for opening a financial account to handle business transactions made under this name.
The Benefits of LLCs and DBAs
Although these two forms of conducting business are vastly different in conception, both can be highly beneficial depending on the circumstances.
For LLCs, some of the main advantages include:
- Simple formation process: The majority of states make the registration process extremely accessible, allowing the organizer to submit the forms online in just a few minutes. You can handle subsequent applications digitally as well, such as your EIN and tax registration;
- Personal liability protection: As a structure, the LLC is designed to protect its owners’ personal assets. As such, should the company be sued by customers or creditors, the members’ securities will be out of reach unless the owner has issued a personal guarantee for specific debts or credit;
- Tax versatility: Unless otherwise specified, an LLC defaults to pass-through classification, meaning the owners record all company profits on their personal reports. However, the state gives you the option of electing other taxation systems for your LLC, specifically that of an S-corporation, which is a popular choice in certain industries;
- Flexible membership: The structure is pretty permissive with membership numbers, so you can run it as a sole owner or as a multi-member company. In both cases, the limited liability remains intact, but the profit allocation should be outlined beforehand. This also allows you to accept investors as members while limiting their executive rights;
- Perpetuity: This business model entails continuous existence unless explicitly stated during the initial registration, meaning it will continue to exist even after you left the company. Like with shares in a corporation, an LLC permits the transfer of ownership, i.e. selling your membership share.
For DBAs, the key benefits are:
- Privacy protection: As an independent entrepreneur or member of a partnership, you might want to keep your personal information out of the public domain by getting a DBA;
- Simple registration: The application process usually involves a one-time filing with the relevant agency in your jurisdiction. Most states let you do it online;
- Marketing flexibility: Companies or solo entrepreneurs that work within multiple industries will generally find it easier to promote their products or services separately. You can also reach specific market segments more effectively when each of your branches/product lines has its own designation;
- Division of finances: When you run a sole proprietorship or general partnership, your business transactions are listed under your own name and go through your personal account. With DBA, you can open a separate bank account for processing all your commercial operations.
The Main Differences Between LLC and DBA in Taxation
As mentioned before, LLCs are taxed as flow-throughs by default unless the owners elect a corporate tax system through Form 8832. By contrast, a DBA doesn’t function as a separate business structure, so its taxation system is defined by the entity it represents.
So if a DBA is not connected to, say, a corporation or LLC, it won’t have the same liability or tax benefits but will instead fall under the tax rules for the individual who uses it for their commercial activities. Let’s look at these differences in more detail.
Reporting as an LLC
- Multi-member LLCs: All members report expenses and profits through personal returns. They report on Form 1065, Schedule K-1 by March 15 and pay self-employment taxes on state, county, and municipal levels;
- Single-member LLCs: These are treated as disregarded entities, classifying the sole owner as sole proprietor who reports income taxes on Form 1040, Schedule C by April 15;
- Employing workers: All LLCs with employees must have an EIN and cover payroll and FICA taxes. The unemployment tax (0.6% on the first $7,000 in wages) is reported on Form 940 yearly, and the social security (12.4%) and Medicare (2.9%) taxes are filed on Form 941 quarterly but are paid throughout the year according to the IRS schedule;
- Sales tax: Most states set sales taxes for LLCs that make a profit from selling goods and services, but it doesn’t stop at the state level—most local jurisdictions impose their own taxes based on industry and location.
Reporting as a DBA
- Income tax: All profits and losses of your DBA are reported on Form 1040, Schedule C of your personal return;
- Self-employment tax: Everything your DBA earns also falls under the self-employment tax (15.3%) consisting of social security and Medicare taxes. Normally, these are withheld by the employer from each employee’s wages, but self-employed people pay it based on their profits. EIN is not necessary in this case since you can use your SSN;
- Quarterly deposits: For self-employed people, reporting is done on a quarterly basis instead of one single automatic tax deduction typically applied to wages. This means that your income and self-employment taxes should be reported on Form 1040-ES, or estimated tax, by the 15th day of each quarter month, specifically April, June, September, and January.
How to Register a DBA
Registering a fictitious name or DBA is fairly simple but certain states have additional steps to the process.
- File the application: You can file the application for registration of a fictitious name with your local agency. You can do it as a self-employed entrepreneur, member of a partnership, LLC, or corporation. You can file locally, though in some jurisdictions this filing has to be done on a state level;
- Pay the service fee: Prices range from $5 to $100 depending on the state;
- File a statement: Most states require you to publish a fictitious name statement before operating under the DBA;
- Check other requirements: See if your state has a waiting period for business transactions (some jurisdictions ask the owners to wait for 30-40 days since the name registration before commencing any transactions);
- Fulfill the DBA publication requirement (if applicable): In some states, you can’t use your DBA without first running a note of registration in a local periodical.
How to Form an LLC
An LLC can be started almost entirely online, depending on your place of registration. The key of LLC formation include:
- Find a name: Pick a fitting name and check its availability with the state’s business database;
- Appoint a registered agent: Without one, you won’t be able to register the company;
- Submit the paperwork: File your Articles of Organization with the Secretary of State;
- Create an operating agreement: although not necessary, this step is highly recommended if you want to run a smooth operation;
- Acquire an EIN: This number is mandatory for all entities that hire employees or want to open a company bank account;
- Open a business bank account: This is crucial for maintaining your limited liability protection. Without it, your personal assets become vulnerable;
- Obtain licenses and permits: Not all states require a general license, but most will ask you to get licensed on multiple levels locally depending on your industry;
Register for taxes: Not all taxes are paid annually in one clean filing. For some of them, you will need to register with different databases.