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Question of the Day: What is the difference between an LLC and a "dba"?

June 3

Question of the Day:  What is the difference between and LLC and a dba?

Short Answer: An LLC protects your personal assets. A dba does not.

Explanation:  LLC stands for LIMITED LIABILITY COMPANY. If an LLC gets sued and loses, the person suing (the plaintiff) can only collect from the assets of the LLC, they cannot collect from the owner’s personal assets.

Here’s an example: Jane Fisherman opens a bait shop. She signs a 5 year lease for $2,500/month, she takes out a $50,000 bank loan to buy product and set up her store, she signs up for internet and phones ($250/month), she hires retail salespeople ($5,000/month).

Let’s say Jane forms Fisherman Bait, LLC and signs those contracts as Owner of Fisherman Bait, LLC (if the LLC is the contracting party and Jane signs on its behalf). Let’s say Fisherman Bait goes out of business in year 3, leaving $2,000 cash in the operating account, $5,000 of furniture and equipment and $50,000 in business debts. So now her creditors (the people she owes money for these business contracts – the landlord, the bank, the phone company, her employees) can sue Fisherman Bait, LLC for moneys owed to them.

If they win, they get a judgment against the LLC for $50,000 and they can enforce that judgment (use it to get the money) against the assets belonging to Fisherman Bait LLC: its bank accounts, furniture, equipment, accounts receivable and other assets. But they cannot enforce that judgment against Jane’s personal bank accounts, her jewelry, the household bank accounts she shares with her husband, the joint bank accounts she has with her children, the family house, the beach house, the gold coins in her safe-deposit box, the money she gets from her investments, the investments themselves.

Even though Fisherman Bait owes its creditors $43,000 more than it owns, and even though the creditors have a judgment from a court of law, and even though Jane Fisherman and her family have more than enough to pay what is owed on the judgment, the creditors cannot collect from Jane Fisherman or her family. Jane Fisherman and her family have built a nice nest egg for their future security, and that nest egg is protected from the creditors of Fisherman Bait LLC. That’s the beauty of Limited Liability.

Now let’s say instead of forming an LLC, Jane registers a dba that allows her to open a bank account as Fisherman Bait. All contracts are signed in the name of Jane Fisherman dba Fisherman Bait. The contracts might be in the name of Fisherman Bait, a sole proprietorship, and she might sign as “owner” or “president” or whatever she wants to call herself.

Now when she goes out of business and her creditors get that $50,000 judgment against her, they can enforce the judgment against anything she owns – bank accounts, real estate, investments, valuables. (There are some rules that allow judgment debtors to keep the basics like a residence, a car, tools of their trade, etc., and retirement accounts are also protected from creditors, but that’s a topic for another article). In this scenario, because Jane decided to just do a dba and not an LLC, she will lose $43,000 of her family’s personal assets.

The Takeaway: If you have personal assets you want to protect, form an LLC or a corporation and use it properly.

TIP:  It’s not enough to just use the letters LLC in your business name, or to “register your business” using the letters LLC after your name. You have to actually file a Certificate of Organization with your Secretary of State and receive it back with a stamp that shows it has been accepted. In many states you need to pay an annual fee.

ALSO:  There’s no federal LLC. An EIN is a federal ID number, which is like the social security number for your business. It is the number you use on your business’s tax returns and the number that the IRS will use to track your business transactions. It does not give you any protection, even if you use the letters LLC. Using the letters LLC or Inc. or Corp. if you are not actually an LLC or a corporation is considered fraudulent.

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