The difference between a "doing business as" designation for a company and a limited liability company is pronounced, but businesses -- especially small businesses -- find advantages in each. An LLC is a business entity that can provide liability protection for the company owner. A DBA isn’t a business entity at all.
For a DBA, It’s All in the Name
A DBA is a fictitious name under which a company operates. It’s also referred to as an assumed business name or trade name. A DBA provides a simple and inexpensive way to legally conduct business under a name that's different from the owner’s personal name. A DBA can also be used by partnerships or by legally organized companies that choose to operate a business -- or a portion of its business -- under a brand or trade name. The owner files the DBA with the relevant county or state government to establish a public record of who is behind the business. It’s the simplest way to obtain an appropriate business name and the cheapest to file.
An LLC Is a Legal Entity
An LLC is a legal business entity that is simpler to form than a corporation. The owner or owners, called members, file articles of organization at the state level. Articles of organization include basic information about the company, such as its name, official address, a list of members who will actively manage the company and a statement of the company’s purpose. The LLC avoids the extensive paperwork and regulations that go with forming a corporation. There’s no need to file a separate DBA for the company because the articles of organization include an official filing of the LLC’s name. The LLC can elect to file a DBA, however, if it wants to operate under a trade name that’s different from the company’s official name.
DBA Liability Falls on the Owner
Debts or claims against a company operating under a DBA pass through to the owner. If the business is a sole proprietorship, the owner’s personal assets are at risk to cover company debts. The same is true for a partnership. This lack of protection for personal assets is a key reason why small business owners choose to create an LLC instead.
LLCs Protect Personal Assets -- If You’re Careful
An LLC protects the personal assets of its members from seizure to cover the company’s debts, but this protection isn't absolute. LLC members must be careful not to mingle business funds with personal funds, or use the company’s bank account as a personal checkbook. If a lawsuit is ever filed against the LLC, a judge can “pierce the veil” of the LLC’s finances to discover if company assets were regularly used for personal purposes. When that’s the case, the court can rule there was no separation between the business entity and the individual owners and this would void any liability protection.
A DBA's Taxes
All profits earned by DBAs are reported on the owners’ personal tax returns. For sole proprietorships, this means all profits are subject to income and self-employment taxes. In partnerships, active partners must also pay income and self-employment taxes on their share of profits.
Tax Options for LLCs
LLCs have options regarding how they're taxed at the federal level, but deciding what's best can be a little tricky. The Internal Revenue Service disregards single-member LLCs as legal entities by default. It taxes the owner as a sole proprietor. The IRS taxes multimember LCCs as partnerships by default. An LLC can also choose to be taxed as a corporation or an S corporation. These two choices can offer tax advantages for the LLC and its members if the company is showing a high profit and is expected to continue to show a profit. With both corporations and S corporations, each managing member must be paid a reasonable wage. Electing to be taxed as a corporation makes sense when the tax rate the business pays on its profits is lower than the personal tax rates members would pay if all profits were distributed to them. An LLC that elects to be taxed as an S corporation must still pass all its profits through to members, but distributions of profits to members aren't subject to employment taxes. LLCs should obtain an accountant’s advice before selecting either of the corporate options.
- Small Business Administration: Register Your Business Name
- Nolo: Articles of Organization
- Robert J. Mintz: Piercing the LLC Veil
- Business Owner’s Toolkit: LLC Electing S Corp Status – The Best of Both Worlds
- Internal Revenue Service: Limited Liability Company
- LegalLees: LLC Tax Election
- Internal Revenue Service: Wage Compensation for S Corporation Officers
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