Starting a new business comes with countless decisions.
- What will you call your company?
- How will you grow your customer base?
- Can you secure enough funding even to get it off the ground?
While all are important aspects of forming your new company, choosing your business structure will have the most liability implications.
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| LLC vs. DBA: What's the Difference?: eAskme |
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You can go several routes when deciding which entity formation is right for your budding venture.
Understanding how these two options work and the liability protections they do or don't provide is essential.
What Is a DBA?
Often referred to as "doing business as," DBAs are essentially a different name from your registered company or your name.
It's like using an alias or assumed name, and it's beneficial to business owners wanting to rebrand or expand into a different industry from their current one.
Typically, DBAs are less time-consuming and more budget-friendly than creating an entirely new LLC for these purposes.
However, there are some cons to using a DBA, such as it isn't a business structure.
It's just a naming mechanism to assist in creating the brand you want.
You also won't necessarily have exclusive use of your DBA name.
For example, some jurisdictions allow the same title to be used by others so long as it's approved for use as a "doing business as" scenario.
Finally, unlike an LLC, DBAs are not a business formation structure.
This means it doesn't provide liability benefits, such as protecting your assets should your company get sued.
It only serves to brand your company by allowing you to use a name you prefer instead of what you registered as a corporation or LLC.
What Is an LLC?
A limited liability company (LLC) legally establishes your business and offers some liability protection for your assets when someone sues you for damages.
This benefit is why many choose this structure when forming a company.
Imagine if you were to go bankrupt and the stakeholders that invested in your endeavor file suit to recover their financial losses.
Only your business assets would be at stake, not personal finances or your home, so long as you have enough liquidity to cover the cost.
But, keep in mind that LLCs and DBAs are not mutually exclusive.
You can operate under a DBA as an LLC!
Key Differences Between LLCs and DBAs You Need to Know:
Taxes:
DBAs don't have any tax benefits.
Your profits are subject to annual taxation, handled through your return. LLCs, on the other hand, can bring significant savings based on the tax status you chose under this category, including:
- Sole proprietorship
- Partnership
- S-Corp
- Corporation
Before committing to an LLC or DBA business structure, consider the amount of tax savings you will have operating as one versus the other.
This can be a key insight that helps you decide which entity is best for your company.
Business Registration Requirements:
LLCs are already popular for business formation because setting one up is ridiculously simple and cost-effective.
But, if the already low registration demands are too much, a DBA is even more afforder and easier to establish.
Let's compare the registration process for both:
LLC:
When forming an LLC, the costs will depend on where you register your business.
Most states only require an initial filing fee, and then you pay an annual charge in addition to any tax requirements.
However, this could be more complicated if your business operates in a different state than where you have it registered.
You'll need to apply as a foreign business and meet the additional requirements to set up your limited liability corporation in that state.
The majority of states also require LLCs to create and submit the following documents to complete their registration requirements:
Articles of Organization:
This public document shares legally required information about your LLC and then gets filed with your Secretary of State.
Operating Agreement:
While not required by every state to successfully register an LLC, an operating agreement is still an essential part of your business.
It outlines the rules and processes to run your LLC, so if there is a dispute between yourself and other stakeholders, this document can often settle it without needing to go to court.
DBA:
DBA filing costs will also vary according to your business's location.
However, fees are typically cheaper than an LLC, though you may have to pay extra if you have more than one owner on your registration paperwork.
Some states have mandatory notification rules for establishing a DBA where owners must first post a notice of intent to operate under a different name in local newspapers.
It's also important to know that you may have to undergo the registration process every year, though some jurisdictions won't.
Business Reporting Requirements:
Other than initial filing paperwork and possible re-registration once a year, DBAs have no additional reporting requirements.
LLCs require regular updates with the states they operate in to ensure their information is accurate, conducting business activities they are licensed for, and are compliant with all other imposed operating requirements.
Registered agents are another mandatory requirement to establish an LLC regardless of where you are in the United States.
This individual is your business's point of contact for receiving critical legal notifications and summons.
Business Insurance:
While an LLC provides some liability protection, it doesn't act like an insurance policy and covers the costs of damages your business causes or legal fees to defend your reputation.
This entity structure protects your assets from being used to pay for liability claims against you.
Your home, vehicles, and savings could be at stake if a loss exceeds your available business assets.
DBAs have no inherent liability protection because it's a mechanism to brand your business with the name you want.
So, if you're operating a sole proprietorship, everything you own is up for grabs if you get sued by a customer.
However, if you form an LLC but operate as a DBA, your finances would receive the protections of that business structure.
Sadly, legal recognition of your personal and business assets being separate isn't always enough when things go wrong during your operations.
While you can opt only to carry general liability coverage, comprehensive business protection for an LLC is one of the smartest investments you'll ever make.
There are numerous risks your company will face every day, including:
- Business interruptions
- Professional mistakes
- Commercial vehicle accidents
- Customer personal injury claims
- Property damage
- Theft and break-ins
- Cyberattacks
- Natural disasters
It only takes one of these incidents to potentially force you to shut your doors forever because of the financial devastation they can cause.
This is why owning a business owner's policy (BOP) is a must regardless of your business operating as a DBA or an LLC.
The potential costs will be the same regardless if you don't have adequate insurance to protect your company's best interests.
If you still have any question, feel free to ask me via comments.
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