Forming an LLC vs. Using a DBA
Starting a business is an exciting venture, and the thought of success can be exhilarating. However, to achieve that success, preparation and understanding the risks involved are crucial.
If you're new to entrepreneurship, you may have heard of a DBA and an LLC, but do you know what they are and which one is right for your business? Let's take a closer look at the pros and cons of each option to help you make an informed decision.
What is a DBA
First, let's start with DBA, which stands for "doing business as." A DBA allows you to use a trade name or fictitious name instead of your legal business name. It's like having an alias for your business. There are a few reasons why you might want to file a DBA:
- An established business wants to rebrand itself or create a new offshoot company without the expense of creating a new LLC or corporation.
- A company wants to expand into a new state but finds their current business name is already taken in that location. A DBA quickly solves that problem.
However, it's important to note that a DBA is not a business structure or a legal entity, so it won't protect your personal assets in case of a lawsuit. Additionally, it doesn't necessarily give you exclusive rights to the name, and someone else could use the same name in some states.
What is an LLC
On the other hand, an LLC or limited liability company is a legal structure that provides liability protection for your business. This means that your personal assets won't be at risk if your company is sued or goes bankrupt. It's a more formal option that establishes your business as its own legal entity and gives you name exclusivity in your state.
As far as taxes go, both options are relatively simple. Your business profits are only taxed once and are passed through to your individual tax return and taxed accordingly. However, as an LLC, you have more flexibility in how you choose to be taxed, which can save you money come tax time.
Filing fees for LLCs vary by state, but they are typically more expensive than a DBA. DBA filing fees also depend on where you are located, and some states require you to refile every year. Ongoing reporting responsibilities also differ between the two, with LLCs requiring more paperwork and bureaucracy.
To recap, a DBA is simple, less costly, and involves less paperwork than an LLC. It also simplifies taxes and affords some privacy for your personal name. However, it does not provide liability protection, has no name exclusivity, and offers no tax savings.
On the other hand, an LLC is a bona fide business structure that offers limited liability protection, name exclusivity, and tax flexibility. However, it's more formal, requires ongoing paperwork and adherence to state laws, and has higher expenses.
Differences in Filing an LLC vs. a DBA
The filing fees for a DBA (Doing Business As) and an LLC (Limited Liability Company) vary by state.
Generally, a DBA is less expensive and simpler to establish than an LLC. The cost of filing for a DBA depends on the location, and in some cities, publishing a notice of intent in a local newspaper is required. LLCs require an initial filing fee and annual/biannual fee, with costs varying by state. The filing fees for an LLC can range from $50 to $500. In addition to filing fees, an LLC may also require other expenses such as operating agreements, initial franchise taxes, and other state-specific fees. On the other hand, filing a DBA is usually less expensive, with fees typically ranging from $10 to $100. However, it's worth noting that the ongoing costs associated with maintaining an LLC, such as annual report fees and franchise taxes, may be higher than those associated with a DBA.
Summing it up
In conclusion, when starting a business, it is important to choose the right structure for your business to ensure success and limit personal liability. A DBA is a simple and less expensive option, but it does not provide personal asset protection or name exclusivity. An LLC offers name exclusivity and liability protection, but it is more formal and requires ongoing paperwork and adherence to state laws, with higher expenses. Filing fees for both options vary by state, with DBAs generally less expensive but with ongoing costs. Ultimately, it's essential to carefully consider the pros and cons of each option to make the best decision for your business.