DBA vs LLC: Which Do You Need, and What Changes for Taxes

DBA vs LLC: what changes for your taxes?

A DBA ("doing business as") is a name you register; an LLC is a business entity you form under state law. With one owner, neither changes federal income tax by default: the profit goes on the owner's Schedule C and Schedule SE either way (IRS: sole proprietorships; IRS: single-member LLCs). What differs is liability, state cost and the tax elections only an entity can make.

A case stops being simple when a second person shares the profit, when you hire, when a client, landlord or license requires an entity, when an S corporation election is on the table, or when your state charges an LLC every year whatever it earns. Gather every name you trade under, who owns the business and shares its profit, the state and counties where you work, any contract or bank that asks for an entity, your hiring plans and last year's return.

What is a DBA, and what does it not do?

A DBA is a registered trade name. States call it an assumed name (Texas, New York), a fictitious name (Florida) or a fictitious business name (California). The filing tells the public who stands behind the name; it creates no new business (Florida Division of Corporations).

A DBA does not:

• Create an entity or limit liability. New York's guidance says a sole proprietor is personally responsible for all debts of the business and general partners are jointly and individually liable for the partnership's obligations, while an LLC member's liability is limited (New York Department of State).
• Change your taxes. The income stays the owner's, on the owner's return.
• Give you rights to the name. Florida says registration grants no ownership of the name and does not stop others from registering it; Texas says a filing does not count as use of the name for priority (Texas Business and Commerce Code, section 71.157). Name rights are a trademark question.

Generally, you need a DBA only to trade under a name other than your legal name. Florida and New York both say no filing is needed for an individual's own legal name, and Florida says the same for an entity's legal name (Florida Division of Corporations; New York Department of State). Skipping a required filing has a cost: in Texas, a business cannot sue on a contract made under an unfiled assumed name until it files (Texas Business and Commerce Code section 71.201), and in Florida, failing to register is a misdemeanor (Florida Division of Corporations).

Does a DBA file its own tax return or need its own EIN?

No. A DBA is not a taxpayer, so it files no return. A sole proprietor reports the business on Schedule C, with the DBA on line C, "Business name", and pays self-employment tax on Schedule SE: 15.3% on 92.35% of net profit (Schedule C; IRS: self-employment tax). Each separate business gets its own Schedule C, whatever names it uses (Schedule C instructions).

A sole proprietor generally needs only one EIN, however many businesses or trade names they run; the DBA goes on Form SS-4 line 2, "Trade name of business" (SS-4 instructions). Changing the business name needs no new EIN; incorporating or forming a partnership does (IRS: Do you need a new EIN?). Many sole proprietors need no EIN at all: the Schedule C instructions call for one only with a qualified retirement plan or for employment, excise and certain other federal returns.

What does an LLC change compared with a DBA?

An LLC is a separate entity created by state statute. The IRS taxes a one-member LLC as part of its owner's return and an LLC with two or more members as a partnership on Form 1065, unless the LLC elects corporate tax (IRS: single-member LLCs). Electing S or C corporation tax is covered in How LLCs are taxed.

A single-member LLC that is disregarded for income tax is still a separate entity for employment tax and certain excise taxes. With employees, it reports payroll under its own name and EIN, not the owner's (IRS: single-member LLCs).

The LLC changes more at the state level than at the IRS:

• Formation and yearly filings. A formation fee, then in most states an annual or two-yearly report or tax.
• State tax a DBA never triggers. Texas franchise tax covers LLCs, including single-member LLCs, but not sole proprietorships (Texas Comptroller). California charges every LLC organized or doing business there an annual tax of $800 (California Franchise Tax Board).
• Liability. State law limits a member's personal liability (New York Department of State). How far that protection reaches is a question for a lawyer.

For the full comparison, see LLC or sole proprietorship.

Where do you file a DBA: state or county?

That depends on the state and on who owns the business. Some states take every DBA at one state office; others send sole proprietors and general partnerships to the county clerk and entities to the secretary of state.

Sources: Florida Division of Corporations; Texas Business and Commerce Code, sections 71.054 and 71.103, and Form 503 instructions; New York Business Express and Department of State; California Secretary of State. Other states differ: check your state's business filing office and, for a sole proprietor or partnership, your county clerk before filing.

Florida adds a step: the name must be advertised at least once in a newspaper in the county of your principal place of business, and you certify that you did so when you sign. California also requires publication: in Los Angeles County, for example, the filed statement must run in a newspaper once a week for four weeks in a row, starting within 30 days of filing (Los Angeles County Registrar-Recorder/County Clerk). A Florida registration lasts five years and expires on December 31 of the final year; a Texas certificate lasts up to ten years.

Can you open a business bank account and take payments under a DBA?

Usually yes, once the name is filed. Florida's Division of Corporations says most banks require proof of registration to open an account, and New York says you may need certified copies of the certificate for your banks (Florida Division of Corporations; New York Business Express). The money is still yours, because a DBA is not a separate owner.

An LLC's account is in the LLC's own name. A one-owner LLC that needs no EIN for tax can still get one if its bank requires it (IRS: single-member LLCs); see EIN for a single-member LLC. For what banks ask for and when to open the account, see Business bank account for an LLC or sole proprietor.

Can an LLC have a DBA too?

Yes. An LLC trading under a name other than its exact legal name files its own DBA: a fictitious name in Florida, Form 503 in Texas, a Certificate of Assumed Name with the New York Department of State. The LLC keeps the same EIN and the same return; the trade name goes on Form SS-4 line 2 and Form W-9 line 2 (SS-4 instructions; Form W-9).

A DBA you filed as an individual generally does not carry over to an LLC you form later; the LLC files its own, as Texas requires (Texas Business and Commerce Code, section 71.103). In Florida, you file a cancellation within 30 days of stopping use of the name, and the LLC can reregister it in the same filing (Florida Statutes section 865.09(4)). For the full move, including what to do with the old filing, see Sole proprietor to LLC. For a second brand inside a company you already own, see Running more than one business.

Payments and 1099s in the DBA name: whose income is it?

The income belongs to whoever stands behind the name: you as a sole proprietor, or the LLC. Payers report under the name and number on your Form W-9, and line 1 should be the name on the income tax return that reports the income (Form W-9).

The IRS says a disregarded LLC's W-9 shows the owner's SSN or EIN, not the LLC's EIN (IRS: single-member LLCs). The number must match the line 1 name; if it does not, the payer may have to withhold 24% of each payment (backup withholding). A Form 1099 that shows the DBA or the LLC's name is still income on the line 1 taxpayer's return.

What does a DBA or an LLC cost to set up and keep?

A DBA usually costs a small state or county fee and a periodic renewal. An LLC costs a formation fee plus, in most states, a yearly or two-yearly filing, and in some states a yearly tax (LLC annual fees and reports by state). The IRS issues an EIN free of charge (SS-4 instructions).

Sources: Florida fees and LLC fees; Texas Form 503, Form 205 and no tax due reporting; New York Business Express, Certificate of Assumed Name and fee schedules.

California is the costly case for an LLC: its $800 annual tax is due every year whatever the LLC earns, and an LLC fee starting at $900 is added once total income reaches $250,000 (California Franchise Tax Board). New York's publication rule is in LLC publication requirement, and every state's formation fee is in LLC cost by state.

Do you need an LLC if you have a DBA?

Not always. A DBA may be enough for one owner with low risk who wants to trade under a brand or test a name. An entity, and advice before you file, are worth weighing when one of these applies:

A tax election is hard to undo. After an LLC changes its classification by election, it generally cannot change again by election for 60 months (Form 8832 instructions), and after an S election ends, a new one must wait until the fifth tax year after the year the termination took effect, unless the IRS consents (26 U.S.C. 1362(g)). Leaving corporate tax for partnership or disregarded treatment is taxed as if the corporation liquidated (26 CFR 301.7701-3(g)). That is why the entity and its tax status are usually settled together, before the first payroll or the first large contract.

Example

These examples are illustrative; figures are in US dollars.

A dog groomer trading as "Happy Paws"

Year 1. A groomer in Florida advertises the name, registers "Happy Paws" as a fictitious name for $50 and opens a bank account with the registration. Net profit of $40,000 goes on the groomer's Schedule C, with "Happy Paws" on line C. Self-employment tax on Schedule SE is about $5,652 ($40,000 × 92.35% × 15.3%). Clients get a W-9 with the groomer's name on line 1, "Happy Paws" on line 2 and the groomer's SSN.

Year 2. The groomer forms "Happy Paws Grooming LLC" for $125, then, within 30 days of moving the business, cancels the personal registration of "Happy Paws" and reregisters the name for the LLC in the same $50 filing. With one owner and no election, the same $40,000 profit still goes on the groomer's Schedule C, with the same self-employment tax. The W-9 now shows the groomer on line 1 and the LLC on line 2.

Year 3. The LLC files its first annual report for $138.75. Federal tax has not changed; the LLC added state filings and the liability limit state law gives its members.

Two friends trading as "Fix-It Bros"

Two friends in Texas split the profit from repair jobs under "Fix-It Bros" and file an assumed name certificate with their county clerk. The name changes nothing for tax: two people sharing profit are a partnership. The partnership gets its own EIN, files Form 1065 and gives each friend a Schedule K-1 showing a $30,000 share, which each reports on their own return. Forming an LLC later would not change the years already filed.

Different for you?

• Someone else already shares the profit under your trade name: past years may already need Form 1065 and Schedules K-1, LLC or not, and the IRS charges a penalty per partner for each month a return is late, for up to 12 months (26 U.S.C. 6698). See Business partners without an LLC and get business tax return help with the partnership return; business formation help applies if you then form an LLC.
• You run the business with your spouse: a business owned only by spouses may avoid a partnership return, as a qualified joint venture if it is not an LLC (Schedule C instructions), or in a community property state if they own the LLC as community property (IRS: single-member LLCs). See Spouse and family LLCs.
• The owner is not a US citizen or US resident: a one-owner LLC owned by a foreign person needs its own EIN and files Form 5472 with a pro forma Form 1120 for any year with reportable transactions, wherever the owner lives; missing it costs $25,000 (Form 5472 instructions; SS-4 instructions). A US citizen living abroad has no Form 5472 duty for the LLC. See Foreign-owned single-member LLC filing; a Canadian resident can start with US business for a Canadian resident.
• You are moving a DBA business into a new LLC: see Sole proprietor to LLC.
• You are adding a brand to a company you already own: see Running more than one business.
• You are hiring, signing a contract that requires an entity, or weighing an S election: compare LLC or sole proprietorship and Should you elect S corporation status?, then get business formation help to set up the entity and its tax status in the right order.
• You want every state's fees: see LLC cost by state.