I’ve seen so many questions lately from new freelancers asking if they should run their business as a DBA (Doing Business As) or an LLC (Limited Liability Corporation). I’ve seen several posts about this question on Facebook and it sounds like people think it’s an easy question. Well, folks, it’s not.
First of all, what’s the difference between a DBA and an LLC? That question is actually easy to answer. When you file a DBA, you are registering a fictitious name, such as “Ginormous Growth Coaching,” that will be linked to your name. You will be able to open a bank account under the fictitious name and accept checks made out to the company name. With a DBA, you can operate your business under a name other than your own.
An LLC is an entirely different entity. When you form an LLC, you register your business with the state by filing an Operating Agreement and agreeing to operate according to your state’s rules for Limited Liability Companies. The paperwork involved in forming an LLC is much more detailed and you may need an attorney to prepare that paperwork. Depending on which state you are in, you may have extra tax returns to file each year and an annual fee due for your LLC.
It’s All About Liability
If you have to spend more time and money to register your LLC and file your annual paperwork, why would you bother? Why not stick with the DBA? It’s all about liability, my friend. I am not an attorney and I don’t play one on TV, nor did I stay at a Holiday Inn Express last night, but the premise of an LLC is fairly simple. By operating your business as an LLC, you have a layer of protection between your personal assets and your worst case scenario. If a client sues you, they could endanger your home, savings and other assets if your business is operating as a DBA. With an LLC, there is a chance that you could lose your business as a result of a lawsuit, but it will be much less likely that you will lose your personal savings and property.
Want more details? Ask an attorney!
The Tax Perspective
Ironically, there is no real difference in filing your taxes if you are operating your business as a DBA or as an LLC. There may be an extra state form to file if you are an LLC and, possibly, an annual fee. For the IRS, however, there will be no difference if you agree to their default classification for a one-person LLC.
I like to tell my clients that an LLC is like a chameleon. There is no such thing as an LLC tax form since an LLC always files their taxes as another entity. If you operate your business as a one-person LLC, the IRS will assume you will be “taxed as” a sole proprietorship. Alternatively, you can elect to be “taxed as” a corporation. If you operate your business as a multi-person LLC, then the IRS will assume that you will be “taxed as” a partnership. You can always elect to be “taxed as” a corporation instead. So, if you accept the default for a one-person LLC, you will be “taxed as” a sole proprietorship just as if you had filed for a DBA instead.
Every state treats LLCs differently and you should always find out what your state requires of your LLC. Here in Pennsylvania, we have an extra tax form that the LLC needs to file each year, but there are no extra taxes to pay. In some other states, however, your LLC may have to pay an annual fee. Save yourself a bunch of time and aggravation and find out what your filing requirements are from day one if you choose to form an LLC.
Bottom line, if you wish to protect your personal assets from possible liability issues, then you should learn a little bit about the costs and filing requirements for an LLC in your state. A little bit of homework now can protect your savings and other assets long into the future.
Do you have any questions I haven’t’ covered? Leave a comment below to let me know what you think!
Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.