How does a DBA differ from a sole proprietorship?
When starting a business, most people begin with a Sole Proprietorship. Easy to set up and simple to operate, a Sole Proprietorship requires nothing but you, your services or goods, and the open seas of commerce. All you have to do is start doing business and your Sole Proprietorship is up and running, typically under your own name.
But, when your enterprise takes off and you start getting an influx of clients and money, things tend to get more complicated. It may be time to create a brand—a recognizable name for clients to identify and connect with.
A DBA is essentially a business name you use instead of the legal name of your business. They are most commonly used by sole proprietors, but any business may have a DBA. For example, a sole proprietor named “Jose Alvarez” may do business as “Jose’s Plumbing Service.” The DBA allows you to maintain a separate identity for writing (and receiving checks), signing contracts, and operating your business, without establishing a new legal structure.
Getting a DBA usually requires you to file a form, usually with the county clerk, and is subject to some standard fees, which vary by locality. Each state regulates DBA filing and requirements differently, so before you begin the process, make sure to familiarize yourself with local regulations. For example, some states may require you to publish a notice of your DBA in a local newspaper to inform customers.
How does a DBA differ from an LLC?
If you want more than just a different name, you may want to consider an LLC. The key advantage of an LLC is that, as the name suggests, you are protected from personal liability. The business’s debts will be collected from the assets belonging to the business; in most cases, your personal assets will be protected. However, this protection isn’t perfect, and in certain circumstances you may become personally liable for the debts incurred by the business.
Forming an LLC creates a new legal entity through which you will control the business. The process of establishing such a company varies from state to state. Typically, you will have to prepare Articles of Incorporation and submit them to the appropriate state agency. While you’re not required to have an attorney help you establish an LLC, it is highly recommended that you at least consult with an attorney or a specialist who is well-versed in the filing procedures in every state.
How do I know whether a DBA or LLC is right for my business?
What’s right for your purposes will depend fully on your business and the operations conducted. Sole proprietors or freelancers often choose a DBA so that they have less legal formalities to follow. Partnerships may also choose a DBA. Before making your final decision between a DBA or LLC, it is best to speak with a lawyer about your specific business needs.
Let’s take a look at the benefits of each business type.
The benefits of an LLC include the following:
- An LLC is a separate legal entity.
- The name of an LLC is the legal name and used when conducting business (although you may apply for additional DBAs).
- An LLC provides personal liability protection.
An LLC is often preferred when liability is a possibility or employees will be hired. The protection given is much higher with an LLC. Expansion and selling a business, and seeking funding, is also easier with an LLC.
The benefits of a DBA include the following:
- DBA is often beneficial when you are doing business under an assumed name.
- Once you function under the assumed name, you can incorporate under your DBA (with that same name) if you wish.
- Better branding opportunities.
For instance, if you are a website owner offering freelance services, a DBA will allow you to legally do business under your domain name. This allows you to have the right to use this fictitious name to conduct business legally. However, a DBA won’t provide any of the benefits seen in an LLC, as it will not be a separate legal entity and will leave liability with the individual who registered the DBA.
There is a much lower cost for doing business as a DBA vs. LLC. A DBA has only two fees: a registration fee and a renewal fee, which is generally necessary every five years, depending on the state. However, an LLC, in most cases, requires the payment of state taxes (often a flat fee).
A sole proprietor that does not want to incorporate will often choose a DBA so that they can brand their name and promote themselves but not have to deal with the requirements of an LLC.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.