Business Name Registration vs. LLC: Which One Can Legally Enter Contracts?

When starting a business, entrepreneurs often find themselves at a crossroads?whether to simply register a business name or establish a Limited Liability Company (LLC). One of the most critical distinctions between these two options is the ability to legally enter contracts. Let?s break down how each structure operates in this regard and what it means for your business.

1. What Is Business Name Registration?

Business name registration, also known as a "DBA" (Doing Business As), is a process where an individual or a company registers a specific name under which they intend to operate. It?s important to note that registering a business name doesn?t create a separate legal entity; it?s essentially a way for you to operate under a name that?s different from your personal name or the name of your formal company.

Key Points of Business Name Registration:

Legal Entity Status: A registered business name doesn?t create a new legal entity. It?s merely an alias for the owner or business.

Liability: The individual registering the business name remains personally liable for any debts or obligations incurred by the business.

Contractual Capacity: Since a business name isn't a separate entity, the person or business behind the registration is the one legally responsible for entering contracts.

Example:

If Dele registers a business name called Dele's Deliveries and enters into a contract, legally, it's Dele who is on the hook, not  Dele's Deliveries.?

2. What Is an LLC?

An LLC, or Limited Liability Company, is a formal legal entity that provides a separate legal identity distinct from its owners (members). This means that the business itself can own assets, incur liabilities, and?importantly?enter into contracts.

Key Points of LLC:

Legal Entity Status: An LLC is a separate legal entity, meaning it can sue or be sued, own property, and enter into contracts independently of its owners.

Liability Protection: Members of an LLC generally aren't personally responsible for the business's liabilities. This provides a crucial layer of protection that is absent in a simple business name registration.

Contractual Capacity: Since an LLC is its own legal entity, it can enter into contracts under its business name. This ensures that the LLC, not the individual members, is responsible for fulfilling contractual obligations.

Example:

If Dele's Deliveries LLC enters into a contract with a supplier, the contract is between the supplier and the LLC, not Dele's personally. If something goes wrong, John Dele's personal assets remain protected, and only the LLC's assets are at risk.

3. The Legal Differences in Contracting

Business Name Registration: Legally, the individual behind the business name is responsible for the contract. This means that if you register a business name and enter into a contract, you are personally liable if something goes wrong.

LLC: The LLC, as its own entity, enters into contracts. If an LLC is unable to fulfill its contractual obligations, creditors typically cannot pursue the personal assets of the LLC members, unless personal guarantees have been made.

4. Which Is Better for Entering Contracts?

The answer depends on the nature and scale of your business. If your business is small, low-risk, or a side project, you might feel comfortable using a business name registration to keep things simple. However, if you're entering into significant contracts, especially those that involve considerable risk or financial obligation, an LLC may be the safer choice.

Key Considerations:

Risk and Liability: An LLC protects your personal assets, while a DBA leaves you personally responsible for all business-related liabilities.

Perception: Larger companies may prefer dealing with LLCs because they are seen as more formal, stable entities.

Flexibility: An LLC gives you flexibility in management and operations, and is often viewed as a more professional business structure.

5. Final Thoughts

If your primary concern is entering into contracts without putting your personal assets at risk, an LLC offers distinct advantages over a simple business name registration. While registering a business name is a quick and cost-effective way to operate under a distinct brand, it doesn't provide the legal protection or the independent standing of an LLC.

Conclusion

Choosing between a business name registration and an LLC depends on the complexity of your business operations, the level of liability you are comfortable assuming, and how much legal separation you want between yourself and your business. For those looking to protect themselves from potential liabilities and present a more formal business image, an LLC is often the preferred choice.

By making the right decision early on, you can ensure that your business is positioned for success and protected against potential risks down the road.