DBA vs LLC: which one a small product business needs

DBA vs LLC: the short answer

A DBA, short for doing business as, is a name. The SBA describes it as a trade name, fictitious name, or assumed name. A DBA lets you conduct business under a different identity from your own personal name or your formal business entity name. It does not create a business. Example: if you sell candles as Amber Wick Co. without forming anything, you are a sole proprietor using a DBA, and the SBA says a sole proprietor is personally liable for the debts and obligations of the business.

An LLC, or limited liability company, is a business entity you form with your state. It has its own legal existence, and the SBA says LLCs protect you from personal liability in most instances. An LLC can also use a DBA if it wants to sell under a name other than its legal one.

So the real choice behind doing business as vs LLC is between staying a sole proprietor with a brand name, and forming an entity that separates your personal assets from the business. The table sets out the main differences.

What a DBA does and does not do

A DBA lets customers, payment processors and banks see your brand name instead of your legal name. For a sole proprietor, the legal name is your own name. For an LLC, it is the full entity name on its formation papers.

Registering the name is often required. The SBA notes that most states require you to register your DBA if you use one. Where you file depends on where you are: some places use the county clerk, others the state, and some cities run their own filing. Requirements vary by business structure and by state, county and municipality.

A DBA has two limits that matter for a product business. First, it doesn’t provide legal protection by itself: it does not shield your savings or your house from a business debt or a lawsuit. Second, it does not reserve the name. According to the SBA, multiple businesses can go by the same DBA in one state. If you need to stop others from using your brand, that is the job of a trademark, which is a separate filing.

What an LLC does

An LLC puts a legal wall between the business and you. The SBA says that with an LLC, your personal assets, like your vehicle, house, and savings accounts, are not at risk if the LLC faces bankruptcy or lawsuits. The SBA also says LLCs protect you protect you from personal liability in most instances, and that that protection has limits.

Forming an LLC takes more paperwork than a DBA. You file formation documents with the state, and an LLC needs a registered agent in its state before it files. The SBA puts the total cost to register a business at less than $300 in most cases, with fees that vary by state and business structure. Check your state's site for any ongoing filings or fees as well as the formation fee.

The SBA suggests an LLC can suit medium- or higher-risk businesses, owners with significant personal assets they want protected. A sole proprietorship, with or without a DBA, can suit low-risk businesses and owners who want to test their business idea.

Liability: the main reason to choose an LLC

For a sole proprietor, the SBA is direct: you can be held personally liable for the debts and obligations of the business. Adding a DBA changes nothing here, because the DBA is only a name for you.

A product business carries risks such as a customer hurt by a product, a supplier dispute, a lease or a loan. The SBA lists product liability insurance for businesses that manufacture, wholesale, distribute, and retail a product. If the business is a sole proprietorship, its debts and obligations are yours. If it is an LLC, the SBA says personal assets such as your vehicle, house, and savings accounts are not at risk if the LLC faces bankruptcy or lawsuits.

An LLC does not cover everything. The SBA notes that that protection has limits, and that business insurance can fill in any gaps in coverage. Keeping business money in its own account also matters: the SBA says business banking offers limited personal liability protection by keeping your business funds separate from your personal funds.

Taxes: often the same for a one-owner business

Many sellers expect an LLC to change their taxes. By default, for a single owner, it barely does. The IRS treats a one-member LLC as disregarded as separate from its owner unless it files Form 8832 and affirmatively elects to be treated as a corporation, and an individual owner reports its activity on Schedule C, Profit or Loss from Business. A sole proprietor using a DBA files Form 1040 and Schedule C, Profit or Loss from Business.

Self-employment tax works the same way too. The IRS rate is 15.3% on net earnings from self-employment, and you owe it when those earnings are $400 or more. A single-member LLC owner pays it in the same manner as a sole proprietorship. The SBA notes that LLC members must pay self-employment tax contributions towards Medicare and Social Security.

Differences appear when the LLC has more than one owner, which is classified as a partnership by default, or when an LLC elects to be taxed as a corporation. Those choices change the filings and are worth discussing with a tax professional. State tax rules for LLCs vary by state, so check with your state's revenue department too.

Bank accounts: what each one lets you open

The SBA says to open a business bank account as soon as you start accepting or spending money as your business. Either route can get you there. According to the SBA, a DBA and a federal tax ID number (EIN) let you open a business bank account. Getting an EIN from the IRS is free.

Banks commonly ask for an EIN (or a Social Security number, if you’re a sole proprietorship), formation documents, ownership agreements and a business license. If you want the account in a DBA name, ask your bank which proof of the DBA filing it needs. An LLC brings its formation documents, and a single-member LLC can get an EIN if it needs one to open a bank account.

Whichever you choose, keep the account for business money only. The SBA notes that business banking offers limited personal liability protection by keeping your business funds separate from your personal funds.

Business license vs DBA

A DBA and a business license are separate things, and you may need both. A DBA registers the name you trade under. A license or permit gives you permission to carry on a particular activity in a particular place.

The SBA says most small businesses need a combination of licenses and permits from both federal and state agencies, and that requirements and fees vary based on your business activities, location, and government rules. The SBA also lists retail among the activities commonly regulated at the local level, so a seller can need a city or county license whether it is a sole proprietor with a DBA or an LLC. Forming an LLC does not replace a license, and neither does filing a DBA.

How to choose between a DBA and an LLC

These steps cover a one-owner product business in the US. Rules vary by state, county and city, and this page is general information, not legal or tax advice.

1. Look at your risk

   If your products could injure someone, or you sign leases, loans or supplier contracts, the liability protection of an LLC carries more weight. The SBA links an LLC to medium- or higher-risk businesses, owners with significant personal assets they want protected, and a sole proprietorship to low-risk businesses and owners who want to test their business idea.

2. Check your state's costs

   Look up the LLC filing fee and any annual report or tax on your Secretary of State's site. In Texas, for example, an LLC files a certificate of formation for $300, while a sole proprietor files an assumed name with the county, where fees are set by each county clerk's office.

3. Decide on the name

   If you sell under a name other than your own, file a DBA. An LLC that sells under a name other than its legal one also needs one; in Texas that filing costs $25 with the Secretary of State.

4. Get an EIN and open the account

   An EIN is free from the IRS. Bring it with your DBA certificate or LLC documents to the bank, and keep business money in that account.

5. Check licenses and permits

   Whichever structure you pick, check your city, county and state for licenses. The SBA says most small businesses need a combination of licenses and permits from both federal and state agencies.

Where Nation fits

Questions about a DBA vs an LLC