A lot goes into starting a new company. From squaring away all your tax information to ensuring you have all the right vendors lined up to create a strong brand, there’s no shortage of things to do.
Many small business owners and independent contractors who open LLCs eventually ask — do I need a DBA too?
Both impact the structure of your business, so it’s important to distinguish the pros and cons of each.
What’s a DBA?
DBA stands for Doing Business As. Most states use the term DBA to refer to this kind of branding, but it does go by other names in other states, such as:
- Assumed Name
- Fictitious Name
- Trade Name
- Trading As
It’s a common misconception that getting a DBA for your business is the same as incorporating it when opening an LLC.
But creating an LLC means establishing a new legally recognized business structure, while getting a DBA simply means having a preferred name for your business recognized. It’s essentially an alias for your company rather than a set of legal protections and expectations for your business.
A DBA allows you to run your business under any name and is especially popular with independent contractors starting to take their work more seriously.
What’s an LLC?
An LLC, or limited liability company, is a legally-binding recognition of your business, which comes with as many protections as it does expectations for you as a business owner. Opening an LLC gives your business a legal structure and is especially popular with business owners looking to protect their assets from their company’s potential debts.
Were your company to go into debt, you would not be held personally liable, as you would if you only had a DBA. A creditor could only hunt down your company’s assets, and your personal assets would remain safe. LLCs can be opened by multiple people going into business on the same venture.
The name you open your LLC under is the legally-binding name of your company. This is why some people choose to get a DBA after they’ve already incorporated their company under an LLC – it allows you to operate your same business under a different name (say if you wanted to start doing business in a new state) but there’s already a business with that name in that state.
How Is a DBA Different from an LLC?
DBAs and LLCs differ, including how you file your taxes, what liability protections are granted, and how costly/difficult they are to open. The fact that they both allow you to operate your business under a different name is where the similarities end.
So let’s dive into the differences.
An LLC is a legal business structure. That means incorporating your company under an LLC has legal implications for how you run it.
LLCs limit your personal liability. That means if your business goes into debt and collectors come calling, they will stop at the bounds of your business. LLCs protect business owners from the consequences if the market turns sour or the business fails.
Now it should be said that not even an LLC will give you the protection your business would enjoy if it were able to be federally trademarked. Trademarks protect companies’ brand names and logos in a way that LLCs don’t. But, not all businesses fall under the “intellectual property” umbrella required to apply for a federal trademark.
LLCs also have numerous implications on business owners tax-wise, for example, you get the option to file as a sole proprietorship, partnership (if there are multiple names on the LLC), C corporation, or S corporation. These filing options help business owners optimize their tax filing when reporting on the local, state, and federal levels.
Getting a DBA for your small company and getting a DBA for your small business, which is incorporated under an LLC, are two different processes.
Because a DBA doesn’t bind you to a legal business structure, it offers less protections and fewer options for the tax season. But there’s another set of reasons one might pursue a DBA over an LLC, or pursue a DBA for their LLC.
If you operate a small but growing company and are going to expand, getting a DBA is a great idea. First, getting a DBA allows you to operate the same company under a different name. That means you can expand into manufacturing and merchandising new products, open a new franchise location, and expand your business into new areas without stretching your brand identity too thin.
DBAs are also great if you’re looking to expand into new states but have found other companies operating there under your same name. Change nothing about your business except its operating name with a DBA, and go forth to conquer your goals.
Do DBA Pay Taxes?
Yes, you pay taxes under a DBA, but no differently than you did without one. All earnings under a DBA are filed in your personal tax return. If you operate an LLC, you will file at least two returns per year, one for yourself and one for your business. Under a DBA, you’ll file one return, including all your earnings related to your company and otherwise.
What Are the Pros & Cons of an LLC vs. a DBA?
There are positives and negatives to operating under a DBA and an LLC. Wherever you get freedom, it comes with restrictions and vice versa.
Pros of a DBA
- Easier and less costly to establish – Because a DBA isn’t a legal business structure, it’s much easier and less costly to start. Getting a DBA follows a different process in each state but usually just requires registering your company name with the business agency in whatever city you primarily do business.
- Simpler tax process – Again, because DBAs don’t have the legality of LLCs, you can file taxes the same way you always have — business and personal expenses together.
- Can open on top of an LLC – It doesn’t have to be either/or. You can open a DBA on top of your existing LLC to conduct business under a second name.
Cons of a DBA
- Not a business structure – Sure, you aren’t obligated to the same level of legal responsibility under a DBA as you are under an LLC. But there’s a downside to that. Without a legally imposed business structure, it’s on you to invent one, and that’s no small task.
- No liability protection – LLCs protect business owners in dire straits. DBAs do not.
- Can’t protect against brand infringement – You have no recourse under the law if someone starts operating a business under the same name in your state or city under a DBA.
Pros of an LLC
- Gives you a solid business structure – Incorporating your company under an LLC provides a solid business structure that will help your company grow.
- Offers limited liability – Should you run into the red with your company, you don’t have to worry about liens being placed on your personal finances or creditors coming after your personal assets.
- New tax options – You can file taxes under a sole proprietorship, C corporation, or S corporation with an LLC.
Cons of an LLC
- Costlier and more complicated to open – LLCs are trickier to open than DBAs. You work and pay for what you get when it comes to LLCs.
- More expensive to maintain – Everything from your company name, filing articles, and operating agreement can cost you, not just when opening an LLC.
- Must operate by state and federal laws – with an LLC, you always need to stay on top of federal financial laws mandated by the IRS and state laws where you do business.
Should I Use a DBA With My LLC?
You don’t need a DBA to run your LLC, but it can be a huge benefit.
Getting a DBA under your LLC means you can change your company’s name without going through the legal rigamarole of actually changing your company’s name. You might want to do this for a couple reasons, like branching into a new type of business or going into a new niche.
Need Accounting Help? Give Us a Call
If you need help with accounting, bookkeeping, or financial counsel over opening an LLC or getting a DBA, contact MI Tax CPA. Small business owners in Michigan deserve help with their books and accounts – it’s hard for anyone to go it alone, so don’t. We can help.
Call MI Tax CPA for professional help with all your financial needs.