Question: When first starting out, is it preferable to set up a business as a DBA/Sole Proprietorship or an LLC? What are the advantages/disadvantages to each? -New WAHM in Little Rock, AK
Starting a new business as a mompreneur is an exciting adventure, but you need more than a sign and business cards for opening day. You’ll need to decide how to structure your business. Will you be a DBA/Sole Proprietor or an LLC?
(Please note I am NOT a legal or tax expert, but here are some basics to get you started.)
What’s the Difference?
DBA stands for “Doing Business As.” By filing a DBA, you can use a trade name for your business transactions. Naming your business provides your customers with information about what you do, and it makes you memorable in the community. For example, I could name my catering business “Choice Culinary Catering” rather than “Missy Ward.”
A Sole Proprietorship indicates that an individual owns and operates the business. Any civil or financial liability faced by your business becomes your sole responsibility. If a customer trips up the stairs while visiting your in-home bakery or you make a typo on a client’s open house banner, your home, vehicle and other assets could be seized in order to satisfy a lawsuit that is filed against your company.
LLC means “Limited Liability Corporation.” It structures your business as a separate entity from you, the business owner. With an LLC, your assets remain protected if a client files a civil or financial lawsuit against your business. As an LLC, you remain responsible for paying taxes on the business’s income.
When DBA is Best
If you own limited assets, a DBA/Sole Proprietorship may be the path for you. Likewise, if your business is unlikely to face civil or financial liability then DBA makes a wise choice. You can always change your business’s structure in the future if your company changes directions or your assets grow.
As a Sole Proprietor, you must file a DBA. During the filing process, you’ll find out if another business already uses your name. You then have the choice to change your trade name in order to prevent customer confusion and protect the reputation of both businesses. Filing a DBA also protects consumers by preventing a bogus company from operating under an assumed name.
When LLC is Best
An LLC provides you with liability protection. It separates your personal assets from your business assets. While the initial paperwork is more complicated than a simple DBA, this business structure works best if you have assets you don’t want to risk losing.
An LLC also protects your name. DBA registers your business’s trade name but does not prevent other companies from using it. If you anticipate building a brand and creating an empire, an LLC ensures your name remains legally protected.
Because the Federal government does not tax an LLC, you will owe income tax on your business’ profits. If you start your business with a partner, you both share the tax liabilities.
How to File and How Much to Pay
After you determine which type of business structure works best for you, contact your state’s Small Business Administration office. You can also gain more information from your attorney or accountant.
When considering the cost, an LLC normally costs more to file than a DBA. With limited funds, starting as a Sole Proprietor is an affordable option. If you own assets, the extra start up cost of an LLC is worthwhile.
Starting a business requires many decisions that can be overwhelming for an entrepreneur. After you’ve chosen your business idea and a name, choose a business structure. Whether you choose to be a DBA/Sole Proprietor or form an LLC, this decision starts you on the road to success as a mompreneur.