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Entrepreneurs starting a new business have lots of options to consider. Many have trouble deciding whether they should start an LLC, register a DBA, or do both.
This expansive guide will cover everything you need to know about DBAs and LLCs so you can decide which one is right for your business.
Why Understanding the Difference Between DBA and LLC Is So Important
DBAs and LLCs are very different from each other. It’s crucial that you understand how DBAs work and LLCs work so you can determine which one is right for your unique scenario.
There are times when DBAs make the most sense for businesses and other times where LLCs are the clear choice. Some of you might fall into a category where you’ll need an LLC and a DBA.
Once you’ve educated yourself and solidified the best option, you can rest easy knowing that your business is set up the way you want. You’ll have a clear understanding of your liabilities and compliance requirements to ensure your business remains in good standing with the state.
What is a DBA?
DBA stands for “doing business as.” The terms “trade name,” “fictitious name,” and “assumed name” are all synonymous with DBA names. Certain states and jurisdictions may formally use different terminology, but it’s all the same thing.
A DBA is not a legal business entity. It’s simply a name that can be used for business purposes.
Sole proprietorships, partnerships, LLCs, and corporations are all potential candidates for registering a DBA name.
For example, let’s say you’re an independent contractor that offers web design services. You don’t have a legal business entity, but you want to register a business name for branding purposes to make yourself appear more professional to clients. Rather than using your own name, you can register a DBA name like “Web Design Plus” or “Superior Design Services.”
Once you register a DBA, you can even apply for an EIN with the IRS using that name. You can use a DBA to open a checking account, apply for credit cards, and even accept payments for checks written to that name.
Many entrepreneurs think that by registering a DBA name that they’re forming a business. But that’s simply not the case. DBA names don’t offer any liability protections or tax advantages.
What is an LLC?
LLC stands for “limited liability company.”
LLCs are legal business entities registered at the state level. When an LLC gets formed, a new entity is established that’s separate from the owner or owners.
As the name implies, the biggest advantage of an LLC is liability protection. If the business gets sued, goes bankrupt, owes money to lenders, or can’t pay creditors, the owners aren’t responsible for any liabilities or debts. So you can only lose up to the amount you’ve invested in the business, and your personal assets will be protected.
Forming an LLC also gives you more freedom and flexibility in terms of taxation. We’ll discuss these options in greater detail later on.
LLCs require a bit more work and effort to get started. They’re more expensive to form and maintain than a DBA. But they aren’t subject to as many restrictions as other business entities, like corporations.
There are scenarios where it makes sense to form an LLC and register a DBA. For example, let’s say you’re opening a new restaurant and decide to form an LLC called “Antonio’s Authentic Mexican Cuisine.”
After six months, you want to start a food truck as an extension of the restaurant. But you don’t want to form another LLC, and you’re not crazy about your existing name for the branding of a food truck. You could register a DBA name as “Tony’s Taco Truck” and use that for the catering side of your business.
Quick Tips to Decide Whether a DBA or an LLC is Right For You
Whether you’re forming an LLC or registering a DBA, you shouldn’t feel intimidated about the process. Rather than filling out the paperwork and filing everything on your own, you can use an online service to handle all of the work for you.
Platforms like LegalZoom make it easy for anyone to start an LLC or register a DBA.
For DBA registration, all you need to do is answer some simple questions about yourself and the name you want to register. LegalZoom will take care of the rest. LegalZoom’s DBA registration service starts at just $99 plus state filing fees.
The LLC formation process is just as easy. The questions will be a little bit more in-depth, but you won’t have to fill out any forms or file any paperwork on your own. LegalZoom will send the appropriate forms directly to the right state agency on your behalf.
You can also use LegalZoom for things like EINs, registered agent services, trademarks, patents, copyrights, and other important business solutions.
If you’re still torn and can’t decide whether a DBA or LLC is right for you, LegalZoom has a really cool tool on its website that you can take advantage of.
You’ll be walked through a series of simple questions that can be answered in less than a few minutes. Based on your responses, LegalZoom will give you a recommendation for your needs.
Keep the following quick considerations in mind when deciding between a DBA and an LLC:
Tip #1 — Liability Protection
LLCs offer liability protection. DBAs do not.
So the first thing you need to do is decide whether or not this is important to you. The answer will really depend on the type of business you have and your exposure to debts and liability.
Generally speaking, it’s in your best interest to go with an LLC to protect your personal assets. If your business has physical products, physical office space, or you plan to hire employees, you’ll definitely want the protection offered by an LLC.
For those of you who run an online service-based business and don’t have any business-related debts, you could potentially get away with remaining a sole proprietor and registering a DBA.
Just know that there’s always going to be some risk involved here, and nobody is immune to a lawsuit. For example, let’s say you offer online consulting services or nutrition coaching. One of your clients could potentially sue you if they follow your diet routine or workout program and end up getting hurt as a result.
Tip #2 — Formation Process and Upfront Fees
Registering a DBA name is about the easiest thing you can do. While the exact requirements vary from state to state, it’s usually just one form, and you’re good to go.
You can usually get a DBA for less than $50, and that’s your only upfront cost. If you’re using a DBA service like LegalZoom, expect to pay a fee for assistance with the setup.
LLC formation is a bit more involved. You’ll need to file articles of organization with the state, create an operating agreement, get an EIN, get a registered agent, and comply with some unique state-specific mandates during the formation process.
Using an LLC formation service like LegalZoom will make your life much easier. They’ll handle all of the legwork on your behalf, which really simplifies the formation process.
LegalZoom’s LLC formation packages start at just $79 plus state fees. Upfront LLC state fees typically range from $50 to $500.
With LegalZoom, you can get everything you need from a single provider.
Tip #3 — Business Name and Branding
LLCs and DBAs actually both give you the advantage of having a business name that you can use for marketing and branding purposes.
You can even use the name of your DBA to open bank accounts and accept payments.
DBAs also work great for privacy protection, as you won’t be forced to use your real name for business purposes. You can just operate under the DBA name.
The biggest difference between the LLC name and a DBA name is how that name is protected. In some states, registering a DBA name will prevent other businesses from using that same name. But these protections aren’t offered nationwide. So you might need to register a trademark to ensure nobody else uses your DBA.
But with an LLC, no other business entity in your state can register or use that name for business purposes or branding.
Long-Term Strategies For DBAs and LLCs
In addition to the quick tips mentioned above, there are some long-term considerations that you should keep in mind before you finalize a decision.
You may not notice the results today or immediately after the decision has been made. But when you look beyond the initial steps and cost, the following factors should add some clarity to determine the best option.
Strategy #1 — Consider the Tax Implications of Your Decision
Regardless of which option you decide to go with, you’re going to be paying taxes. That’s just part of doing business. But LLCs give you more tax options than DBAs. Here’s what you need to know:
If you’re a sole proprietor registering a DBA, nothing is going to change in terms of your tax situation. All earnings made from your DBA will still appear on your personal return and will be subject to regular income taxes and self-employment taxes.
Self-employment taxes are where sole proprietors get hit the hardest. That’s because they need to pay 15.3% taxes on all net business income before deductions.
By default, LLC income will automatically flow to the personal returns of members based on their share of ownership. But LLCs have the ability to be taxed as a corporation, which gives you some more flexibility.
You could elect to be taxed a C-corp, and the business will pay a flat corporate tax rate of 21%. This avoids self-employment tax, as the IRS doesn’t view LLCs taxed as C-corps as people who are self-employed. On your personal tax return, you’ll pay capital gains taxes on whatever you receive from the LLC. But this income is technically taxed twice—once for the business and again on your personal return.
LLCs that choose to be taxed as S corporations have some more options. In this case, the business itself does not pay income taxes. You’ll only pay taxes on what you pay yourself as a salary. This income is subject to self-employment tax, but you can control how much you’re paying by giving yourself a reasonable salary.
In short, LLCs give you three different potential taxation options to consider. DBAs don’t offer any tax benefits.
Strategy #2 — Review the Ongoing Requirements Beyond the Initial Setup
DBAs are much easier to register than LLCs. We’ve already established that. But you should also look at what it takes to maintain your business after the initial formation process.
In many states, you can register a DBA once and not have to worry about doing much afterward. There aren’t any annual reports you need to file or anything like that.
Even the registration requirements are fairly lax. For example, DBAs in California must be renewed every five years. DBAs in Texas are good for ten years before a renewal is required.
The ongoing requirements to maintain an LLC are a bit more involved. Most states require an annual report, annual fee, state taxes imposed on your LLC, and more. You’ll also have to keep a registered agent on file with the state for the lifetime of your LLC. This is an extra cost to consider and a requirement for you to remain compliant.
Ultimately, LLCs require more paperwork and ongoing costs to maintain compared to DBAs.
Once you’ve finalized whether or not you should start an LLC or register a DBA, you’ll still need to come up with a great name. We have an in-depth guide on business names that can help find a name that works well for your company.
You’ll also need to obtain an EIN. If it’s your first time going through this process, check out our step-by-step tutorial on getting an EIN.
For those of you who are starting an LLC, you’ll have to decide whether or not it’s going to be member-managed or manager-managed. This can be a tough decision if you’re working with multiple partners. To help provide some clarity and direction, read our guide on members vs. managers in an LLC.