Deciding between a DBA or LLC
Since starting my own studio early this year, I have learned a lot about the business side of things! Rather than keeping these nuggets to myself, I thought it would be helpful to share what I learn along the way in a new column “Lessons learned.”
With that said, I want to be clear that my thoughts are for informational purposes only and are not for the purpose of providing legal or financial advice. I highly recommend seeking advice from a lawyer or accountant for professional advice.
Initially when I was freelancing on the side of my full-time job, I held a sole-proprietor, or DBA. Mostly because that seemed to be the easiest and simplest way to do business. If you are freelancing at all, even if just for a project here and there, I would suggest you get a sole-proprieter. This helped me change my mindset into a legitimate freelancer, as I began to keep track of my business expenses, prepared estimates/invoices, etc. With the sole-propriteorship in place, you can open a business bank account for a simple way to keep track of your business transactions. A sole-proprietor is also necessary if you plan on freelancing with a local design studio. They will ask you for your EIN (Employer Identification Number) near tax time, in order to prepare their 1099 for you. Simply put, it is best to go ahead and make your side freelance gig a legitimate business. Because, really, it is.
Now that I am pursuing this whole independent design studio thing, I went ahead and created an LLC. This allows for much more freedom, as well as the ability to expand in the future.
The LLC is also not tied to a certain county, but rather to a state. Texas is huge y’all… so I’m okay with that. Even if you live away from your state, your LLC still has you covered. I move pretty much every year, so being limited to one county through my sole-proprieter was not an option.
In an LLC, your personal assets (house, investments, etc.) are all protected. They are not considered a part of your business, so therefore if a creditor needed to collect business debts, they could not pursue your personal assets. Hopefully this wouldn’t happen, but just in case, it is better to be safe! On the other side, if you just had a Sole Proprietorship (DBA), then anything is fair game as the personal + business assets are considered the same.
Forming an LLC will make your business appear more professional to prospective clients/customers, because they will see that you have made an official commitment to your business.
Are you avoiding the LLC because you are afraid of taxes? One of the greatest benefits of the LLC is that it is not a separate tax entity, it is what the IRS calls a “pass-through entity.” It simply means that the LLC owners are to write-off expenses and report the income of the LLC on their personal taxes, so really the tax process of an LLC is similar to a DBA. Again, I still recommend talking to an accountant and probably letting the accountant take care of your taxes for you.
When to make the switch?
When I walked into my accountant’s office, I fully intended on keeping my sole-proprietor and not doing an LLC. The LLC seemed like something a larger company would do, and almost silly for just me. The accountant mentioned that once your company turns a profit, it is time to switch to an LLC, or another corporation. Turning a profit is not as simple as it sounds. The profit is calculated after all deductions are accounted for, including car milage and any other business expenses. Once I have a better grip on all these tricky deductions, I will write a post on those.
I ended up switching to an LLC mainly for the flexibility in location. The LLC also allows more room for growth as Spruce Rd. expands. Really though, I would suggest meeting with an accountant and seeking their professional opinion on what you should do. The accountant is an investment that is definitely worth it and gets you on the right, and ethical, start to your business.