So maybe you’re not doing this personal training thing as a business yet, or you just teach one class a week as a 1099 contractor for a gym. You might be wondering the difference between a dba and an LLC? And why you might choose one over the other. Or maybe you have a great name for your business but you’re not sure if you want to make it legit?
dba is an acronym that means “doing business as” – it is another way of describing using a name that is not your own to do business. Some states require you to register this name and connect it to your social security number. Now, a dba can also be used by a company (whether Limited Liability, S-Corp, or Corporation) and often is when they are working in an industry that is different from their primary industry.
When someone asks about the pros and cons of dba vs llc what they are really asking about are the pros and cons of sole-proprietorship versus forming a limited liability company.
You can be a fitness professional, have liability insurance and conduct a business as a sole proprietor doing business as some awesome business name.
The decision between sole-proprietorship and llc is not determined by whether you have a physical place of business, employees or whether you work as a fitness professional full time. Trademarking a business name also does not depend on whether you have formed a company rather than do business as a sole proprietor.
The issue is, what do you have to lose by operating a business as a sole proprietor?
The answer is depending on your liability risk, you might be risking everything.
LLC is an acronym for limited liability company. The “limited liability” part refers to the liability protection offered by the business form. What this means in practice is that the debt of the company belongs to the company and not to its owner as an individual (this includes if the LLC is sued, or goes bankrupt), a sole proprietorship offers no such financial protection. An exception to this is that the owner is liable for any loan guarantees or personal guarantees they may in relation to financing offered to the company.
A LLC (when it has a single member) also allows for the owner to file federal taxes as either a corporation or a sole proprietorship. An accountant can help you with this choice. This decision on the taxation front is really a decision about whether to pay income tax as a corporation or whether to take advantage of the profits “passing through” to the owner personally and reported on their personal tax return on schedule 1040 (IRC § 162(l).). An LLC rather than the owner is responsible for payment of employment taxes (Treas. Reg. § 301‐7701‐2(C)(II).).
It should be noted that some state jurisdictions do not allow for single member limited liability companies, which may limit your options. In this case you would either need a business partner, go with the sole proprietor option, or incorporate as a corporation. Furthermore, in some states there are increased attempts to pierce the corporate veil of single member LLCs on the basis that only having one member means that it is harder to separate the company from the individual. It is important to make sure that which ever way you choose to go in terms of sole proprietorship or limited liability company that you keep your finances separate and operate your company as a distinct entity, and sign any and all contracts in the name of the business entity.
An LLC requires more paperwork and maintenance at the federal and state level than a sole proprietorship. Generally speaking a LLC can apply for an Employer Identification Number whereas a sole proprietorship generally uses their personal Social Security Number (SSN) as their Taxation Identification Number (Treas. Reg. § 301.7701‐2(C)(ii).). States have varying rules about even registering a sole proprietorship or a dba at the state level, whereas LLCs generally need to file articles of organization and often need to file an annual report and perhaps pay business franchise taxes. An LLC is often required to send official notice to the state that a LLC is no longer in operation whereas this is not usually needed in the case of a sole proprietorship.
A sole proprietorship requires that you report all assets and income on your personal taxes. This can make things simpler for someone for whom your primary income is not from your own business. Operating “dba” does not legally or financially distinguish the business from you as the sole proprietor. You are personally responsible, both financially and legally for all activities of the business.
As any business grows and looks to hire additional employees and undertakes work on a grander scale, then their liability risks also increase. This often means that sole proprietorships end up incorporating at a later date. With good advice, converting from one form to another can be done, but it doesn’t come without additional complexity.
What form should I choose: sole proprietor (dba) or LLC?
What is your risk of liability? Can you afford to lose everything if you are sued? What level of liability does your business carry? If it is a low risk, low liability situation, then sole proprietorship (or dba) might be a legitimate choice for you.
Are you looking to operate a business for a short time – like a 3 month market season or you are trying out a name – or is this a business you have long term plans for, even if you are just starting out? If this is a short term or time limited proposition then a sole proprietorship might may sense, however, given that the financial cost of forming a LLC is relatively low then the liability protection may be cause enough to choose to form a LLC.
Dba or LLC are not your only choices! There are other business forms other than sole proprietorship and limited liability company. You should speak to attorney about the best business form for your situation, and to an accountant about the best form for your personal taxation circumstances.