In this blog article, I will seek to answer one of the most common questions that I’m asked, which is: “should I use a DBA or an LLC for my business?” For most people, the quick answer is that an LLC provides much more benefit.
What is the Difference Between a DBA and an LLC in Texas?
One of the first things that an individual will do when starting a business is to establish a name and the legal entity by which they will do business. So which is best for your business in Texas, a DBA or an LLC?
A DBA and an LLC are completely different types of business filings. When it comes down to which is the best option for your needs, both a DBA and an LLC will offer some benefits and disadvantages, but they are completely different options! Depending on you, your goals and your type of business, it’s important to look at the pros and cons to decide what will work best for you.
Most importantly, a DBA does not provide liability protection or a “barrier to personal assets”, but an LLC does!. If you’re paying attention to nothing else in this entire article, that is the one thing you should take away. But, if you have space for two things to take away, the second is that you can do both! Of course, always remember that when you are forming any new company, getting the assistance of an experienced Texas business attorney can help.
Now, let’s get into a little more detail.
DBA 101, What is It?
Operating a business as a DBA (short for doing business as) means that you are operating that business under a fictitious name or “trade name” or “assumed name”. Instead of using your own legal name, the DBA, will be the official trade name of the business and the way you will market it to your clients or customers. DBAs, which are actually called Assumed Names in Texas, are governed by the Assumed Business or Professional Name Act.
When an individual operates under a DBA, they are basically operating that business as a sole proprietor – hopefully you remember from the educational material I have created on LLCs, this is a BAD IDEA, and gives rise to unlimited personal liability. But an entity like a corporation, LLC, or partnership can also use a DBA. In this case, the corporation may want to use a DBA as a recognizable brand apart from its legal name. Having a DBA will allow the business owner to open up accounts in the DBA’s name, but these accounts and assets are officially owned by the individual or business that filed the DBA.
In San Antonio, filing for a DBA only requires filing an Assumed Name Certificate Form with the Texas Secretary of State’s Office with a nominal filing fee. Because the DBA is legally owned as a sole proprietorship or by another official business entity, all the DBA’s assets, as well as the business’s liabilities, belong to the person or entity that filed for the DBA. And in most cases, operating as a sole proprietorship is a bad idea.
The Pros and Cons of a DBA in Texas
A DBA is easy and cheap to create, involving far less paperwork and requirements than creating an LLC. It keeps the taxes simple – BECAUSE IT IS NOT AN ENTITY AND HAS NO EFFECT ON TAXES – so the taxes will be paid by the owner and not by the DBA. It also affords the owner a small amount of privacy and the ability to create other affiliated DBAs without creating a whole new corporation or LLC. You can file as many DBAs as you would like and have additional associated DBAs without fundamentally changing the core legal operating documents of the business entity.
There are, however, disadvantages to having your company set up as only a DBA. A DBA is merely a marketing alias and not a legal business entity or structure. Consequently, the DBA doesn’t have any of the legal protections that other business structures have. As I have highlighted a few times above already, this is a very significant drawback.
The DBA also doesn’t protect the owner’s assets from claims and lawsuits. If someone chooses to file a lawsuit against a DBA, they are filing a lawsuit against the owner. If that is an individual, all your personal assets, including your home and bank accounts and any other assets, may be at risk. In other words, a sole proprietor who files a DBA is legally no different than a sole proprietor who does not file a DBA.
LLC 101, What Is It?
While both DBAs and LLCs enable a business owner to name the business something other than their legal name, that is where the similarities stop.
LLC is an acronym for limited liability company. Unlike a DBA, an LLC is a business structure that operates as a separate legal entity from the individuals who own it. One of the main reasons people choose to establish their business as an LLC is the protection from personal liability that it affords (if done correctly). If the LLC is sued, the owners are not personally responsible for any of its debts or legal liabilities, unlike a DBA.
An LLC is managed by the owners, called members, or a manager that is hired by the owners. These members can be investors and have little day-to-day involvement with the company, but this must be set out in the operating agreement. Your share of an LLC may be sold or passed on in your estate, similar to a corporation. Whereas an LLC will have more structural requirements than a DBA, there are far fewer of them than a corporation.
Pros and Cons of an LLC in Texas
Unlike a DBA, an LLC provides a legal barrier between the owners and the business obligations or liabilities. When an LLC is sued or incurs debt, the owners generally cannot be held personally liable, and their assets are generally protected. A DBA does not offer that same strong barrier.
An LLC offers some tax advantages over a DBA as well. Members have the flexibility of choosing how they want to pay taxes and often choose a corporate structure that affords greater tax advantages than a sole proprietorship.
Although an LLC offers some important advantages, there are some procedural and registration complexities that must be legally attended to.
In the state of Texas, LLCs are governed by the Texas Business Organizations Code.
Forming an LLC requires the members to adopt an operating agreement that sets out company procedures. It must file articles of organization, elect a registered agent, register for an Employer Identification Number, and file an annual report with the Secretary of State, as well as maintain a minute book with resolutions and consents to show the entity’s actions etc. Although creating an LLC is relatively simple, there are a few more procedural hoops than creating a DBA.
Getting Professional Advice to Compare DBA vs. LLC in San Antonio
What is best for your company? That depends. If you have questions about your options and what will work best for your enterprise, it’s always best to seek the legal advice of an experienced Texas business attorney. At the Law Offices of Ryan Reiffert, PLLC, we are San Antonio business law attorneys experienced in guiding business owners to make the right decisions for their companies. Contact us to learn how we can help.