I’m often asked if it’s better to form a new LLC or just use a DBA under an existing LLC. In this article, we’ll discuss a little bit about what each is and the pros and cons of each avenue. Ultimately, the two options are extremely different.
DBA
DBAs are also “doing business as” names, assumed names, or fictitious names. These terms can be used interchangeably. The DBA is a recognition by the state and local government that your company is operating under a name other than your company’s legal name. In an LLC, a company’s legal name is the name it was registered as. For example, Law Plus Plus’s legal name is R. W. Bobholz Law, PLLC. If I were operating a sole proprietor company, that company’s legal name would be “Richard Bobholz.”
The purpose of a DBA is to let the public know who they are dealing with. That way, customers and venders know who to hold accountable in case there’s a problem.
LLC
A limited liability company is a separate entity type that provides liability protection for its owners. Unlike a sole proprietor or partnership, an LLC must be filed with the state. You can form an LLC by filing Articles of Organization with the Secretary of State in North Carolina.
Differences
The differences between these two things are great. One is a separate legal entity whereas the other is an alias. A DBA, by itself, provides no legal protection for the company or the owners of the company. An LLC has a liability shield protecting the owners from most actions of the company.
When Should I Use Them?
It would seem that an LLC is always the best case. However, that’s not my opinion. In all the following scenarios, my first advice is to separate out fields of high liability. You don’t want one product line or business idea increasing the liability of the entire company.
Here are certain scenarios I encounter frequently and what I’d generally recommend.
Different Lines of the Same Business
If you’re simply adding a product or service line to an existing business, a DBA makes the most sense. There’s no reason, in this case, you’d want to increase your cost or administrative burden to expand your business in this way.
Small Test Business
Sometimes you’ll want to create a new business, but you’re not sure how much time, effort, and money you want to put into it. In this case, it might be a good idea to do the DBA first and see how it goes. In this case, I’d still try to separate out everything like bank accounts so you have an image of how well the test business does.
Different Ownership
Any time your new venture has a different ownership structure than the original business, you’re going to need to separate them out. I’ve worked with too many companies that try to create different ownership structures within the same LLC and it does not work. Fixing it is also an extremely costly endeavor.
I hope this article has helped you understand when to use a DBA versus forming a new LLC.
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