You’ll come across inevitable steps when forging your path to entrepreneurship – formulating an idea, writing a business plan, obtaining funds, etc. But one of the most crucial steps you will stumble upon is deciding what your company’s business type will be. Among small businesses, the most popular types of structures are DBAs (doing business as) and LLCs (limited liability company). To help you decide which type is best for your business, we’ve complied basic information about DBAs and LLCs so you can move forth on your entrepreneurial journey.
DBA (Doing Business As)
DBA – also known as trade name or assumed name – is the operating name of a sole proprietor, partnership, or corporation. A DBA is typically used for marketing and promotional purposes. Additionally, most banks require sole proprietorships and partnerships to have a DBA before setting up a business bank account.
Until you file for a DBA, your birth name and your business name are legally the same. For example, John Doe plans to start up a doughnut shop, but without filing a DBA, he is forced to name it John Doe. Once he registers for a DBA, he can name the shop whatever he wants, including John’s Doenuts.
One of DBA’s key benefits is that a business can file multiple DBAs while still being under one legal entity. Let’s say John Doe decides to launch another business alongside his doughnut shop. This time, he’s eyeing the bar industry. He can register for a DBA and name his watering hole John’s Bar and Grill. John’s doughnut shop and bar business will both be under legal entity of John Doe.
LLC (Limited Liability Company)
An LLC is a legal entity that is separate from the owner or owners of a business. If your business runs into legal trouble, your personal assets will be fully protected. This is the main difference between an LLC and DBA. Since a DBA is not a separate legal entity, your personal and business assets are one in the same, and you will be personally liable for any business decisions or actions taken.
When forming an LLC, which is usually done at the state level with the secretary of state, the name you choose for your LLC will be your business’ legal name. So, if John Doe formed an LLC for John’s Bar and Grill, the legal name of the business would be John’s Bar and Grill, LLC.
For both LLCs and DBAs, start-up costs and maintenance costs are present, but the prices for DBAs are much smaller than the prices for LLCs. Plus, most LLCs are required to file annual reports to the state. This document contains information about your company’s activities from the previous year.
How Does a DBA and an LLC Affect Taxes?
As mentioned previously, a DBA is not a separate legal entity. If you’re a sole proprietorship or partnership operating under a DBA, then you must file your taxes on your individual tax return.
For an LLC, depending on how many members you have, you can file your taxes as a sole proprietorship, partnership, Subchapter S corporation or C corporation. The reason: The federal government does not recognize an LLC as a business entity for tax purposes. Here are the forms you would need to file taxes:
- Sole proprietorship – Form 1040 (Schedule C, E, or F).
- Partnership – Form 1065.
- Corporation – Form 1120.
- Subchapter S Corporation – Form 1120S
Just a fair warning, if you file as a C corporation, you will be burdened with double taxation, which means your company’s profits would be taxed as well as your personal income.
The choice between filing for a DBA or forming an LLC depends on your industry, current business situation and goals. To pick the best option for you, talk to our friends at LegalZoom. They provide legal advice for individuals and entrepreneurs alike and also offer online registration for your DBA or LLC. Once they help you determine what’s best for your business, reach out to us for your tax and accounting needs.