Did you know the second that you receive money in exchange for a product or service or even something that’s part of your side hustle, you’re considered a sole proprietor? I’m going to make sure you understand what that means for you and show you how to legally secure the business name that you desire. So let’s dive in.
When Are You Considered A Business?
So the moment that you accept money in exchange for a product or service that you provide, even if it’s a side hustle and you have a full-time job, you’re receiving earned income and that makes you a Sole Proprietor. By default, the name of your Sole Proprietorship is your name, and the number that you would use on any tax forms, like a W-9, I-9, Schedule C, would be your Social Security number. But what if you want to call your business something else, or what if you don’t want your Social Security number floating around?
As a Sole Proprietor, you can go to your state and you can file what’s called a DBA. DBA means “Doing Business As.” So, for example, you would be Jane Smith doing business as ABC Photography. This would allow you to use ABC Photography and your logo and use that name for marketing on a website. Whatever you want. And then you would take that DBA name that you registered with the state and you would register for a Federal Tax ID, or EIN. The Tax ID, or EIN number, is going to allow you to use that number in association with your DBA so that your Social Security number is not floating around.
You can also form an LLC. This will also be at the state level. LLC stands for “Limited Liability Company” which means that you have limited liability. So let’s say somebody were to sue you for something. They can only sue your business for everything that is connected to your LLC. So your LLC would have a name, and then you would have a tax ID, or EIN number, for that business on the bank accounts. Everything you would register for that business would be connected to that Tax ID and that name. So if somebody sued you, they would only be able to take the assets that belong to the business, not your personal house or your vehicle or any of your savings.
DBA and LLC Breakdown
The important thing to note here is that a DBA is nothing more than a Doing Business As. You are just securing the business name for marketing purposes and so you can get a Tax ID. It offers no liability at all. The LLC, however, does. Both a DBA and the LLC are at the state level. That’s where you’ll register for these.
Let’s say you want LLC to be like Jane Smith Enterprises. You could have several different DBAs underneath that LLC. You could have ABC Photography and also have XYZ Photo Editing. This allows you to have different ways to market all with the same LLC. However, you would have one tax ID for all of these underneath that and they would umbrella up.
If you’re interested in learning more about business structure and how all these things work, you should definitely check out my Business Structure Bootcamp. It’s important to note that given the information the LLC provides you limited liability and the DBA is nothing more than securing the name for marketing purposes, the DBA is usually much cheaper to form than the LLC. That can help you when it comes to the decision of which one you’d like to do now. You could always form a DBA and then later on as your business grows, then you could form the LLC, but you’ll have to get a new tax ID when you do that. And that’s important to note, because then you’ll have to go and update anywhere that you have that tax ID and business name, including bank accounts, business credit cards, loans, et cetera.
When to Legally Secure Your Business Name
It’s also important to know that if you are doing business of any kind, even when you are accepting cash, you are considered a business under your first name with your Social Security number, and you have to start filling out a Schedule C with your tax return because that is earned income. So then if you’re going to grow this into the next level, this is where you can start looking at how to legally secure your business name that you desire for your marketing purposes to grow your business.
I hope that this helped you understand DBA and LLC: How to be Legit.
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