Business owners don’t always understand the differences between “doing business as” (DBA) and “limited liability company” (LLCs). Let’s simplify the distinctions by focusing on three differences: liability, legal formation, and marketing.
The limited liability company is a form of business known for its flexible corporate structure and its liability formation. People usually refer to it as simply an LLC. A DBA, by contrast, is not a formal business entity. A DBA is the name the business uses. Often, companies are both an LLC and have a DBA. For example, Apple Orchard Company, LLC d/b/a Johnny Appleseed.
1. Liability Protection for LLCs vs DBAs
It’s hard to overestimate the value of liability protection to a business. Every business needs it. Without it, YOU are liable for debts, obligations, injuries, damages, and so on. The LLC has become the preferred entity that provides this protection whether to a single member (aka solopreneur) or to a law firm. Most of the time an LLC is a great place to start your business journey because of the ease of setting up and liability protections.
Practically, what does it mean to get liability protection through an LLC? Let’s look at an example. If the business is sued or owes money, investors and owners are not personally on the hook. The business assumes responsibility for all liabilities, thereby shielding owners, members, and investors.
Does a DBA provide liability protection? No! A DBA does nothing to provide liability protection, which is why companies often pair an LLC with a DBA. The DBA is really just a name, so it’s essential to make a business is formed with a liability protecting business entities.
Pro Tip: The singular thing to avoid is operating as a sole proprietorship (meaning, without an LLC) and thinking a DBA helps. Understand more about the dangers of a sole proprietorship here.
2. Legal Formation for LLCs vs DBAs
An LLC is a legal entity recognized by both state and federal law. It’s more than a name, it’s a legal designation. In most states, an LLC must make a tax designation and declare how it intends to be governed – member-managed or manager-managed (usually). For this reason, the LLC is an essential element in protecting your business – along with a proper operating agreement.
By contrast, a DBA does not come with loads of rules, protections, or tax implications. It’s simply a name. When you set up a DBA, you are essentially telling the local, state, and federal governments “This is the name of my business” but I’m organized under a different name.
A restaurant group, for instance, maybe organized under the following LLC: The Smith Group. “The Smith Group, LLC” could have three restaurants DBA as follows: The Pizza Gut, The Pasta Gut, and Ice Cream Gut. The DBAs do nothing to provide liability protection, instruct on taxation, or indicate management obligations. The Smith Group, LLC does, however, provide liability, tax, and management information for each of the DBAs.
3. Marketing for LLCs vs DBAs
The DBA is essentially a marketing tool. It allows a business to use a name that it wants to put out to the word even without an LLC. With a DBA you can name your company with the strategic advantage of marketing the company as well.
Let’s take the example of the esteemed Dr. J. Henderson. Dr. Henderson might have his doctor’s office and a side business that sells cough medicine. They are both medical-related so he sets up Henderson, LLC, but with the DBA he can name the cough medicine “Goop Graber” to catch the attention of customers. No one wants Dr. Henderson’s cough medicine when you can get some Goop Graber. So let the DBA do marketing (and let the LLC provide protection).
Pro Tip: If you can secure an LLC with the same name as your business, then skip the DBA process altogether. Better yet, file a trademark to start protecting your name immediately. Learn more about how to pick a name that you can trademark here. If this information is starting to get overwhelming, consider our Business Law 101 course that is designed to explain all of these legal concepts in a super simple way that everyone can understand whether you are brand new to business or have years of experience. Also, be sure to search for your name to make sure it is not already trademarked – you can search on the USPTO here.
The lesson you should learn…
The bottom line is that many businesses benefit from having an LLC and a DBA. Use them together to get all the advantages you need. What you need to avoid is running a business without an LLC or other liability protection. That could be a disastrous oversight.
If you and your business partners need help setting up your LLC or learning more about entity formation, visit www.draftedlegal.com for more information. We’ve made it easy to set up your business quickly while equipping you with the tools you need for success. Browse our free articles like this or step up your business knowledge with our Business Law 101 Course where we teach you the ins and outs of running a business, legally.
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