Should You Be an LLC, DBA/ABN, Neither?
Starting a business can be one of the most rewarding experiences, but can bring with it uncertainty and stress that may seem overwhelming at times. One of the earliest decisions that needs to be made is how to structure your new business. While there is no simple answer to this, as many businesses have different needs, understanding the options will allow you to make the most educated choice. Since our focus is on small businesses and startups, I won’t be discussing corporations, and partnerships will be addressed in a later blog post. The following are the most common ways new small businesses organize their start-ups and the benefits of doing so.
Own Name - The easiest way to do business is to use one’s own name as the business. For example, mowing lawns, a common first-job for many motivated teens, doesn’t necessarily require any special organization. A person would simply have checks made out to their personal name and the business would be this name, with revenue being reported as personal income. This is a very easy way to start earning money, but it has its limitations and is not a great choice unless the business is a small, service-based side-hustle.
DBA or ABN - One of the most common and inexpensive ways to organize a new business is “doing business as” (DBA) or an “assumed business name” (ABN). The use of DBA and ABN are interchangeable, with most states using one or the other. This is used when a company want’s to establish a name different than their personal name for their business. A house cleaner looking to grow their business, may have started with a few customers and receiving payments made to their personal name, but they are now scaling their business and are looking to become a more established entity. Filing a DBA or ABN will register their trade name with their state and can be just about anything they want (within reason, obviously). This could range from “John Smith’s Housekeeping” to “Capital City Cleaners,” or anything else that would help create and establish their brand. With a DBA or ABN, the business revenue and assets are still considered those of the owner, similar to using one’s own name.
Limited Liability Company - A limited liability company, or LLC, is my personal favorite choice for a small business and is often the best structure for many startups. It provides more protection to the owner(s) but also comes with more requirements for the business. Limited liability means exactly that, it limits the liability of the owner(s) in the event the company is sued or accused of wrongdoing. A good way to look at it is as added level of insurance for the owners and their assets. The assets of the company are kept separate from those of the owner(s) and the LLC is considered a separate entity as well. Each state has different requirements and costs associated with an LLC, and it may not be the best option for everyone. Steps must also be taken by the owner(s) to actually treat the business as a separate entity. Failure to do so will allow the court to “pierce the corporate veil,” or in other words, go after the owner(s) assets in the event of a lawsuit.
Each of these three types ultimately accomplish the same goal but consideration should be made given your particular circumstances. If you’re simply doing some work for a friend or neighbor on the weekend? There may not be a need for a DBA or LLC. On the other hand, if you’re a small manufacturer creating goods that could leave you open to a lawsuit, either legitimate or otherwise, an LLC is likely the best choice here. I will add that there is quite a bit more to each of these than what is listed. They could, and may soon, have posts of their own. The purpose of this post is to simply introduce those that are unsure about the difference as to why one might be better than the other. Please reach out if you have any questions and we’ll do out best to point you in the right direction. Only you know what is best for you, but White Rain Consulting is here to assist in any way possible!
