Understanding DBAs and How They Can Be Dangerous for Your Small Business
Many small business owners think that they can get by without forming an LLC and instead decide to operate their business with a DBA (“Doing Business As”) name, also known as a fictitious business name or trade name.
What Is a DBA or Fictitious Business Name?
A DBA is often used by sole proprietors who want to operate their business under a separate business name that is different from their individual name. In most states, registering a DBA name gives your business the ability to use a fictitious business name; however, a DBA name is not the same as a legal business entity and it does not give you the same limited liability or legal protections as an LLC or other corporate structure for your business.
Why Use a Fictitious Business Name?
There are two main situations where business owners would want to use a fictitious business name or DBA:
- Sole Proprietor or Partnership: If you are a sole proprietor or cofounder of a partnership and you want to do business with a name that is different from your personal name, you can register a DBA name. This gives your business a certain marketing identity that is separate from your personal name, but it’s not the same as a corporate structure in the eyes of the law.
- Corporation or LLC: If you already have set up a business structure and incorporated, but you want to use a different business name other than the name of your corporation, you can register a fictitious business name for this purpose.
Advantages and Disadvantages of Using a DBA
Using a DBA name for your business is better than nothing — it gives you a more “official” business name that you can put on business cards and on your business website. It helps give your business an identity that is separate from simply doing business under your own name.
However, the advantages mostly stop there. If you do not have a corporate structure set up for your business, such as an LLC or S Corporation, a DBA name does not offer you any special protections and can even be risky.
There are a few key reasons why operating your business with a DBA can be risky:
- Lack of Naming Rights: Using a DBA does not give you official rights to your business name. If you have not incorporated a business and assigned it the name of the DBA, anyone who registers a legal business entity can take your DBA name. Just because you have been using the DBA name, even for years, does not give you any permanent rights to that business name. Here at Incfile, we often hear from customers who tell us stories like, “I’ve had this business name for 10 years” as a DBA name, but because they never officially filed an LLC or incorporated a business with that name, and never took steps to trademark the business name, the DBA name was not officially “theirs” and was therefore free to be taken by a competitor.
- Lack of Legal Protections: Using a DBA also does not give you the same legal protections and limited liability as an LLC or other corporate structure. With a DBA, you have a name to put on your business cards and that’s about it. You don’t have the “corporate shield” to protect your personal assets from your business liabilities, and you do not have the various tax benefits that are available from setting up a legal business entity. If you’re doing business with a DBA name, you are mostly unprotected from the risks and liabilities of doing business. You’re not much better off than if you were just a sole proprietor with no business name at all.
- County Level vs. State Level: DBA names can be registered at the state or county level, depending on where your business is located; some states do not require any registration of DBA names at all. Using a DBA name is often limited to the local county where your business is located; it doesn’t mean your business name is protected everywhere. A DBA name just means you’re able to do business in that county, but anyone else who wanted to incorporate a business under that name could potentially register that business name and use it for their own. A DBA by itself does not offer you much protection outside your local area.
Common Questions (and Answers) About Using a DBA
If I have to set up a corporate entity, but I want to operate under a different company name, will I still be protected?
One of the best reasons to use a DBA name is if you already have set up a corporate structure for your business. Let’s say that you have a business that provides residential painting services and one day you decide to expand your services and start providing residential flooring services.
What you can do is obtain a fictitious business name or assumed business name, which will allow you to operate under a name that is relevant to your new service offerings. In addition, you will still be able to use the same EIN and not need to file a separate tax return for the new service line of your business. The assumed business name will essentially allow you to operate the new business line as an extension of the existing LLC.
There are two caveats associated with this type of filing: one is that not all states offer the assumed/fictitious business name at the state level, and if this is the case, then your secondary option is to obtain a DBA under the LLC or corporation structure, which will essentially achieve the same thing.
The second caveat is that all the ownership of the new business must be identical to the original, or else it may cause complications in filing the company’s taxes. A DBA does not allow you to get a separate business bank account for that aspect of your business, or manage the finances for that aspect of your business separately; it is just a name.
If I have an LLC, do I still need a DBA?
For most people, the answer is no, unless you want to operate your business under a different name than the LLC. For most people who use a DBA, it means that they are operating as a sole proprietor. (For example, Jackie Jones operates as a sole proprietor graphic designer, and she decides to do business as: “Jackie Jones Designs.”)
In this case, for a sole proprietor, the DBA is an extension of the natural person. But if you are operating as an LLC or corporation, then the company is treated as a separate legal entity that is different from the person or people who own it.
As mentioned earlier, a DBA is useful for an LLC if your LLC has a name that is not relevant to part of your business, and you want to offer a different product line or different area of service.
For example, let’s say you own a business called Joe’s Handyman Services LLC and you want to start offering services for plumbing and general mechanic services. Filing DBAs for these separate types of services will let you keep your existing LLC without having to form a new business entity. You can keep your existing LLC and file DBAs for “Joe’s Mechanic Services” and “Joe’s Plumbing Services,” but all are included under the overall umbrella of that same LLC.
This lets you expand your services and conduct business under a different name, but still be protected under your existing LLC. For example: “Joe’s Handyman Services LLC DBA: Joe’s Mechanic Services.” This indicates that your company is able to offer multiple lines of business under the same LLC name.
Another example: Jane Smith is a real estate agent who runs her own business called “Jane’s Real Estate Sales LLC.” In addition to selling homes, she decides to start offering consulting services to help other real estate agents with staging and photographing homes for sale.
For this new line of business, Jane decides to file a DBA called “Jane’s Home Staging and Photo Services.” In this case, filing a DBA can help a business owner create a separate identity for one aspect of her business, without having to set up a separate LLC or other business structure.
The bottom line: if you are a sole proprietor, you’re probably going to be better off setting up an LLC instead of just operating with a DBA name. A DBA name in and of itself cannot protect you or offer you the same advantages as an LLC or other corporate structure.
However, if you already have an LLC or other corporate structure for your business, a DBA can be a useful way to expand your services or change your business name without losing the existing business entity.
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