- What are DBAs and LLCs?
- What are the pros and cons of registering as an LLC?
- What should you register your small business as?
Q: Should you register your small business as an LLC or just as a DBA?
A: Most small businesses should register as an LLC because it gives your company more credibility, legal, and financial protections.
It’s never been easier to start your own business.
The internet has created a plethora of new opportunities, allowing you to start operating from anywhere. This set the stage for an explosion of small businesses.
The pandemic ushered in that boom. More people are leaving their corporate jobs to create startups.
While this has made it simpler than ever to start your own business, there are still a number of technical considerations you need to make. Chief among these is how you register.
Different registrations carry different levels of liability and tax statuses. As a result, how you register can have a big impact on the success of your business over time.
Should you use a small business LLC? Should you operate under a DBA? What if you operate your business out of your home?
Many small businesses use a virtual office address for their LLC registration.
This article will look at both types of registration, weighing the pros and cons so you can make the choice best suited to your business.
- What is the difference between an LLC and DBA for your business?
- What are the Pros and Cons of Registering as an LLC instead of a DBA?
- Who should Register as DBA?
What is a DBA?
One of the most common ways solopreneurs and small businesses register is as a DBA.
DBA stands for “doing business as.” In other words, this type of business registration essentially functions as a pseudonym.
A DBA lets you operate in the business space without having to use your real name. This allows you to use a more creative and enticing title for your business, adding a marketable element and helping you appear more professional.
DBAs allow you to tailor your branding to suit your target audience more easily in some cases.
The process of attaining a DBA varies from state to state.
In some regions, DBAs are filed with the state agency responsible for business operations. In other areas, you’ll file for a DBA with the city or county.
What is an LLC?
By contrast, an LLC is a way of registering a business that’s closer to the registration you might get for a corporation.
LLC stands for “limited liability company.” As the name implies, this kind of registration functions to reduce the amount of legal liability you face.
More specifically, LLCs provide protection for your personal assets. Your business assets are functionally separated from your personal assets.
While they do bring slightly more complex tax proceedings, LLCs are still very simple to file. LLCs don’t require many of the administrative components of larger corporations.
To get a small business LLC, you only need to have a business address and a registered agent. You don’t need to hold shareholder meetings or have a board of officers.
You also do not need a traditional office. Many small business owners operate out of their homes, on the road, or from coworking centers. In this case, using a virtual address for LLC registration is the smart thing to do.
This makes LLCs a fantastic choice for new businesses, as they can benefit from the liability protection without having to invest in expanding the structure of their business.
What is the difference between a DBA and an LLC?
DBAs and LLCs have a number of differences, such as
- Liability protection
- Registration cost
For starters, a DBA isn’t a business structure. Rather, a DBA is simply an alternative title under which a business operates.
The business owner typically just uses their social security number for business tax purposes.
This means that a DBA offers no liability protection.
By contrast, an LLC is a formal business structure. LLCs do offer personal liability protection, as they separate your personal assets from your business assets.
This means that if you’re business ever faces a lawsuit, you won’t have to worry about assets like your home, car, or savings being included.
Small business LLC taxes are also different than those filed under a DBA. This is largely due to the fact that DBAs are just formal pseudonyms. Those who file for a DBA are treated very much like independent contractors or the self-employed would be.
DBAs file their taxes in a very straightforward manner. They are subject to all state and federal taxes in their entirety in most instances.
Small business LLC taxes are different though. They can file under a variety of business structures that allow for expanded tax breaks.
The up-front cost of registration is typically higher for LLCs than for DBAs, though not substantially so. That said, because the cost of a DBA varies regionally, this isn’t always the case.
LLCs and DBAs both offer you the ability to choose a business name. Sole proprietorships and small businesses that register as either an LLC or a DBA both avoid having to use the owner’s name in their branding.
Owners of both small business LLCs and DBAs can open an account and make deposits under their given business name as well.
DBAs and LLCs each offer a layer of privacy. They keep your business from being directly linked to your name, which can help keep you from having your private details available to the public.
What are the Pros and Cons of Registering as an LLC instead of a DBA?
If you’re a small business or solopreneur, you want to register in a way that’s going to best support your growth. In most cases, an LLC will achieve this better than a DBA.
For starters, let’s consider branding. Both LLCs and DBAs allow you to brand your company and avoid using your personal name.
That being said, LLCs are a bit more expensive in most instances to register. If branding and anonymity are the sole focus, DBAs have a bit of an advantage.
However, from a legal perspective, LLCs decidedly take the upper hand.
LLCs are subject to pass-through taxation, just like DBAs. Pass-through taxation is a form of taxation where the individuals in the company are taxed, rather than the company as a whole.
This means that both LLCs and DBAs experience similar taxes. LLCs have an added benefit though.
Because they are a type of formal business structure, LLCs typically open up more opportunities for tax breaks. It’s easier to relate expenses to your business when there is a formal structure separating that business from you personally.
Speaking of separating yourself from your business, LLCs are particularly beneficial because of their liability protection.
Under a DBA, you are still personally liable for any issues you may face when operating your business. If you’re sued or go bankrupt, the assets involved aren’t limited to your business, but extend into your personal assets as well.
By contrast, LLCs separate your business assets from your personal assets. If your LLC faces a lawsuit, you won’t have to worry about things like your house or personal savings being jeopardized.
Hopefully, you won’t need to worry about this kind of thing, but if the situation ever arises, an LLC can save you from financial ruin and allow you to bounce back much better than you would under a DBA. Small business LLC insurance is far stronger than that of a DBA.
Who should Register as DBA?
DBAs might be right for you if you are looking to keep your operational costs to a bare minimum.
Brand new startups with extremely tight budgets may choose to register a DBA rather than an LLC initially to help the initial investment in their company low while still gaining a sense of professionalism.
Additionally, freelancers or gig workers may choose to register a DBA. Since they are operating in a much different space than an outright business providing tangible products, they may not have the same liability worries.
In these instances, filing an LLC may be excessive for their needs.
Finally, an already established business may file for a DBA in addition to their existing registration if they want to expand into a new market. A DBA can enable them to rebrand to target new audiences without having to file an entirely new business registration.
Who should Register as an LLC?
LLCs are almost always a good idea, even for entrepreneurs who are just getting started.
If you are new to the market or just starting to gain traction, putting in a small business LLC application can set you up for success. You’ll be able to focus your energy on growing your business without the stress of worrying about your personal assets.
LLCs are a great fit for sole proprietorships, partnerships, or small companies. Their tax structure means each individual within the business will pay based on income, simplifying tax proceedings and keeping everyone involved financially protected.
Even for businesses that operate remotely, filing for an LLC can be helpful and easy. You can file using a virtual address, meaning you don’t even have to have a brick-and-mortar location.
If your business could benefit from liability protection in any capacity, filing as an LLC is probably the best choice.
If you’re looking to increase your small business’ credibility and achieve a bit more privacy, you can do so with a DBA or an LLC. That said, LLCs offer a layer of protection and organization that DBAs don’t.
While they are typically a bit more expensive to register, the increased cost of an LLC is usually offset by the additional tax breaks you can file for.
You should strongly consider registering your small business as an LLC for the added security and organization it affords.