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.
Sole Proprietor
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.
LLC
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.
Flexibility
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.
Protection
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.
Credibility
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.
Taxes
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.
Aimee Guzman
I read this post exactly one year ago and now I’m coming back to it because I’m thinking of doing an LLC too! Thanks for sharing!
Dawn W.
Hey! Awesome post – thank you! I know we are in the same city, so I was wondering if you could recommend an accountant! I’m wanting to start 2016 right by making sure everything is in order – any suggestions would help!
Dara Baker
Is there any case where you would think that a DBA might be a better option than LLC? I’m still trying to decide between the two and am curious.
Jasmine Katrina
So glad I saw this, I just launched my business and want all the advice I can get, especially starting out at 22-years-old. Thanks so much for sharing!
Anna E. Lee - Interior Design
Great post! I’m in the process of registering my company and have been going back and forth between being a sole proprietor or an LLC. Your article helped to confirm my decision to become an LLC!
Jamie
Great! So glad it was helpful! It really seems like this HUGE decision, but once you decide you don’t even think about it anymore. The LLC has worked out great for my business!
Emily
This was also a SUPER HELPFUL post. I’m a new business owner & am currently trying to figure this out for myself (as well as a business name). Thanks again for sharing what you’re learning, Jamie & with such beautiful design style.
xx, Em
Jamie
So glad this was a great resource for you! Let me know if you have any other questions that I could help with, and I can do a follow up blog post!
Erica
wha?!? This is exactly what I needed spelled out for me. I’m taking that freelance class and it still just didn’t make sense! Thank you! Question: before starting your business did you set aside a starting fund to operate out of? And who is your accountant? 🙂
Jamie
So glad this is helpful Erica! I definitely don’t know the ins and outs of business yet, but I am learning along the way. Before starting freelancing full time, I freelanced on the side and saved up all of that money in its own bank account (through my DBA). Then when I went full-time freelancing, I transferred that money into my new LLC bank account (and closed the DBA account), as well as deposited a bit of “seed-money” from my personal bank account. This allowed me to have enough money in my Spruce Rd. bank account to pay for expenses, as well as pay myself along the way. That all sounds a bit complicated, so let me know if you have any other questions! My accountant is Brandon Oehlke (http://www.oehlke-cpa.com/). He is in Seguin, but was referred to us and he is great! He can handle things over the phone or email as well.
~ Carmen ~
Creating your own business is difficult yet so rewarding. Thanks for this information because I was wondering what the benefit of going for an LLC was.:] // ▲ itsCarmen.com ▲
Jamie
Thanks for stopping by Carmen! And agreed – starting your own business is challenging, but is also so fun! Hope this post helps you!
Kercia
You should see my eyes right now (wide open in astonishment)! I’ve never even thought about these things! Time kick it into gear! Thanks a million for this!
Jamie
Glad it was useful for you! A DBA or LLC is really easy to set up, and it helps a bunch with taxes! Let me know if you have any other questions!