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Editorial 11 MIN READ

DBA vs LLC in August 2021: a new federal line between them

The Corporate Transparency Act draws a reporting line around LLCs that the sole proprietor trading under a fictitious name sits outside of

The Editors
Staff, Incorporator.org
11 min read Updated
Contents 7 sections
  1. What the CTA adds to the LLC column in 2021
  2. The federal tax column, still flat
  3. The liability column, still doing the heavy lifting
  4. The state column, where the gap has always lived
  5. Walking the 2021 math on a real number
  6. Rule of thumb
  7. Sources

n 2021, the DBA vs LLC comparison picks up a new column. The Corporate Transparency Act, enacted January 1, 2021 as sections 6401 to 6403 of Public Law 116-283, imposes a federal beneficial-ownership reporting obligation on nearly every LLC in the country, and on zero DBAs. A sole proprietor trading under a fictitious name sits outside the regime. The member of a single-member LLC sits inside it.

We have run this comparison twice before, first in September 2016 when the argument was almost entirely about the liability shield, and again in February 2019 when the Tax Cuts and Jobs Act had flattened the federal tax side and left the shield holding the whole case. The 2021 update is the first time the federal government itself has drawn a line between the two forms.

What the CTA adds to the LLC column in 2021

The reporting obligation lives at 31 U.S.C. § 5336, inserted into the Bank Secrecy Act by section 6403 of the NDAA. A "reporting company" is any corporation, limited liability company, or other similar entity that is either created by filing with a secretary of state or formed under foreign law and registered to do business in the United States. The drafting is deliberate. The regime attaches to the act of filing a creation document, which puts LLCs, LPs, LLPs, LLLPs, and statutory trusts inside it, and leaves sole proprietorships and general partnerships outside.

The practical consequence for the DBA-versus-LLC decision is simple. A DBA is a filing by an existing legal person (usually a natural person) that the person is transacting business under a name other than their own. No entity is created. A county clerk writes the fictitious name into a register under statutes like Cal. Bus. & Prof. Code § 17910, N.Y. General Business Law § 130, or Tex. Bus. & Com. Code § 71.051. The sole proprietor remains a sole proprietor. The CTA does not see them, because no state-level creation filing occurred.

An LLC, by contrast, exists because somebody filed articles of organization with a Secretary of State. Once FinCEN's implementing rule takes effect, 31 U.S.C. § 5336(b) will require that LLC to report the full legal name, date of birth, residential or business street address, and a unique identifying number from a non-expired passport or state driver's license for each beneficial owner (any individual who exercises substantial control or owns at least 25%), and for each company applicant. FinCEN published an advance notice of proposed rulemaking in April 2021 (86 Fed. Reg. 17557) and is working toward the statutory January 1, 2022 deadline for final rules. Existing LLCs will have two years from the effective date to file their initial report; LLCs formed after the rule's effective date will file at formation.

The civil penalty for willfully failing to report, or for willfully filing false information, is up to $500 for each day the violation continues. The criminal penalty is a fine of up to $10,000 and imprisonment of up to two years. A year-long compliance miss tops out around $180,000 before criminal exposure attaches. These are not rounding errors on the formation decision.

Twenty-three exemptions sit at § 5336(a)(11)(B). Most are for already-regulated industries (SEC-registered issuers, banks, insurance companies, CFTC-registered entities, 501(c) and 527 organizations). The two that matter for the small-business reader are the large operating company exemption at (xxi) and the inactive entity exemption at (xxiii). The operating-company test requires more than 20 full-time U.S. employees, a physical U.S. office, and a filed federal return showing more than $5 million in gross receipts, and all three conditions must hold. The inactive exemption requires an entity formed before January 1, 2020, with no active business, no foreign ownership, no ownership change in the preceding 12 months, no funds moving greater than $1,000, and no assets. A quiet holding LLC that collects rent from one tenant and pays property tax does not qualify.

The LLC formation decision in 2021 is therefore a decision to file with the state now and with Treasury later. The DBA decision is a decision to file once with a county clerk.

The federal tax column, still flat

Nothing in the CTA changes the Treasury Regulation § 301.7701-3 check-the-box regime that controls how the two forms are taxed. A domestic single-member LLC remains a disregarded entity by default under Treas. Reg. § 301.7701-3(b)(1)(ii). The IRS looks through the LLC to the member. Income and expenses land on Schedule C. A sole proprietor trading under a DBA files the same Schedule C. The forms are indistinguishable at the federal-income-tax level until the owner affirmatively elects otherwise.

Section 199A still applies identically. The final regulations at T.D. 9847, issued February 8, 2019, define a qualified trade or business to include one conducted by the individual directly or through a disregarded entity, so the 20% qualified business income deduction reaches both forms on the same terms. For 2021, Rev. Proc. 2020-45, § 3.27 sets the threshold amounts at $164,900 single and $329,800 married filing jointly, above which the W-2 wage and UBIA-of-qualified- property limitations in IRC § 199A(b)(2) begin to bite and the specified-service-trade-or-business phase-out runs.

Self-employment tax is the same in both forms. The 2021 Social Security wage base is $142,800, per the Social Security Administration's October 2020 announcement. Above that ceiling, the 2.9% Medicare tax plus the 0.9% Additional Medicare Tax on high earners under IRC § 1401(b)(2) continue on net earnings from self-employment.

For a freelance developer clearing $120,000 in 2021, the federal return is identical whether the business runs under a DBA or through a single-member LLC. Same Schedule C, same QBI, same § 199A deduction, same SE tax, same tax table. What is no longer identical is the list of filings owed to the federal government during the life of the business. The LLC owes a beneficial-ownership report once FinCEN's rule takes effect, and an updated report within one year of any change in reported information (the proposed rule may shorten the update window). The sole proprietor with a DBA owes nothing to Treasury beyond the return.

The liability column, still doing the heavy lifting

Section 199A may have flattened the federal tax comparison, but the tort and contract columns still separate the forms. A sole proprietor with a DBA contracts in the person's own name. The DBA is a label. A plaintiff with a claim arising from the business goes to the person's house and the person's savings account. A commercial landlord sues the person. A tort plaintiff sues the person. An employment claimant sues the person. The DBA changes the letterhead, not the defendant.

An LLC, properly formed and operated, is the contracting party and the defendant of first resort. A judgment creditor of the LLC must collect from LLC assets before reaching the member, and reaching the member requires either a personal guarantee (standard in commercial leases, working-capital credit, and some trade-credit lines) or a successful veil-piercing argument. Veil doctrine varies by jurisdiction but converges on a unity-of-ownership-and-interest prong and an inequitable-result prong; the corporate-law articulation in Walkovszky v. Carlton, 18 N.Y.2d 414 (N.Y. 1966), has been carried into LLC case law across most states with minor adjustments. The single-member LLCs that get pierced are the ones where the owner treated the entity account as a personal checkbook, paid household expenses out of it, and signed contracts in the member's individual name. The shield is conditional on the owner treating the entity as real.

Nothing in 2021 changed this part of the analysis. What changed is the price of the shield on the federal side. The LLC formation decision now includes an expected compliance burden for beneficial-ownership reporting that the DBA does not carry. A solo consultant who would have formed an LLC in 2020 because the $300 Delaware tax and $125 registered agent were trivial insurance now adds the expected cost of one FinCEN filing at formation, any updates for address changes or driver's license renewals, and the legal housekeeping to get a simple operating agreement to obligate the member to provide the reportable information. The shield remains worth buying for anyone with real tort exposure. It is more expensive to maintain than it was two years ago.

The state column, where the gap has always lived

State treatment still decides the math for many small-business owners. California charges an $800 minimum annual franchise tax on every LLC doing business in the state under R&TC § 17941, regardless of income, plus a Form 568 return and a gross-receipts fee that tiers up starting around $250,000 of California-source revenue. A sole proprietor trading under an FBN in Oakland pays none of that. Tennessee reaches SMLLCs with its franchise and excise tax (Tenn. Code Ann. § 67-4-2004) and does not reach a Schedule C filer. New Hampshire's Business Profits Tax and Business Enterprise Tax hit LLCs above modest thresholds. New York's LLC publication requirement under N.Y. LLCL § 206 runs several hundred to more than a thousand dollars in New York County. Massachusetts's annual report fee is $500 for LLCs. Delaware's annual LLC tax is $300 flat, due June 1 each year.

None of these attach to a DBA. A California FBN is a county filing that costs roughly $26 to $60, plus a four-week newspaper publication under Cal. Bus. & Prof. Code § 17917 that runs another $80 to $200 in most populous counties, renewed every five years under § 17920. The five-year all-in cost of a California FBN sits in the low three figures. The five-year all-in cost of a California LLC, with the $800 annual tax, a $70 formation fee (as of August 2021; California's AB 85 first-year waiver is live for LLCs formed January 1, 2021 through January 1, 2024), and a commercial registered agent, sits above $4,000.

Add the expected cost of CTA compliance to the LLC column, and the state-plus-federal-paperwork gap widens further. Subtract it from the DBA column, which carries none of it, and the practical cost delta between the two forms is larger in 2021 than it has been in any year we have run this comparison.

Walking the 2021 math on a real number

A solo photographer in Alameda County clears $95,000 of net business income in 2021, filing single with no other income. Under a DBA, she files a Schedule C, runs $95,000 through her individual return, calculates self-employment tax at 15.3% of 92.35% of net earnings under IRC §§ 1401 and 1402(a), deducts half of SE tax above the line, and takes the standard deduction ($12,550 for single filers in 2021 under Rev. Proc. 2020-45). Her qualified business income deduction is 20% of QBI, capped at 20% of taxable income minus net capital gain; with her income well below the $164,900 threshold in Rev. Proc. 2020-45 § 3.27, the deduction is clean. She owes California income tax on the adjusted amount. She owes nothing to Treasury beyond the return. Her one-time FBN filing and publication cost a few hundred dollars five years ago.

Now form the LLC. Every federal number on her Schedule C is the same. Her California return adds the $800 franchise tax under R&TC § 17941 and a Form 568. Her formation fee under California's AB 85 waiver is $0, not $70; a commercial registered agent runs roughly $100 a year. First-year incremental cost of the form change, at the state level: about $900. Recurring annual cost, at the state level: about $900.

Once FinCEN's final rule takes effect (outside date January 1, 2022 under 31 U.S.C. § 5336(b)(5)), she owes a beneficial-ownership report at formation if the LLC is new, or within two years of the effective date if the LLC is existing. She owes an updated report when she moves, when she renews her driver's license, or when anything else reportable changes. If she uses a formation service as company applicant, that company applicant's data also lands in the report. The time cost of these filings is small; the cost of forgetting one is the per-day civil penalty. Insurance against that cost, which will be sold by registered agents and formation services as a monitoring subscription, will land somewhere in the $50 to $200 per year band based on comparable registered-agent product tiers already in market.

For the $900 plus the FinCEN overhead, she gets a liability shield against the kind of claim that can reach her savings account. If her worst plausible downside is an unpaid invoice and a disappointed client, the shield is insurance against an unlikely loss. If she rents a studio, hires a second shooter as a contractor, holds inventory of printed work, or shoots at venues where a lighting rig could injure a guest, the shield earns its keep.

Rule of thumb

In 2021, form the DBA if the worst plausible outcome of your business is losing an unpaid invoice; form the LLC the moment that outcome is a claim that can reach your savings, and budget for one more federal filing than you had to budget for last year.

Sources

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