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In part 2 of this series, we discussed how to incorporate multiple businesses under a single “umbrella” LLC, Corporation or Partnership by filing multiple DBAs or fictitious business names. Many people often have questions about filing a DBA registration to create a fictitious business name. And many just simply ask, what is a DBA?
The DBA is often misunderstood, but it can be a valuable way to promote your business and gain some protections of your rights as a business owner. However, you need to make sure you know exactly what a DBA is and is not as well as the limitations of a DBA so you may protect your intellectual property and trademark rights.
Many small business owners believe a DBA is actually a separate business entity. It is not!
What is a DBA?
A DBA is merely an application made to the state in which you request permission to utilize a different name than the name your business legally registered for and obtained. Think of a DBA certificate as a permission slip granted by the state for to you call your business (or a line of your existing business) a different name.
A DBA is not a separate business entity. And more importantly, it does not offer the small business owner any liability protection whatsoever!
A DBA really is the acronym for “doing business as” and it represents a fictitious name certificate for you (if you are a sole proprietorship) or your business entity.
Why File for a DBA?
There are many reasons why a business owner may choose to file for a DBA or fictitious name certificate after they have started a business. Many times, they simply don’t like the original name chosen or it doesn’t align with the brand image for marketing purposes.
Many business owners also believe if they add multiple businesses to their original business, that they should file a DBA certificate for each new business. While this may be necessary and desirable, it’s very important to understand that there is no legal separation of liability between each of these businesses with separate DBA certificates! Should something go wrong with one of the operations marketing under a DBA and held under a single business entity, all lines of business may be in jeopardy!
The lack of legal separation with a DBA is an important point, so let’s walk through an example:
Jonathan starts a restaurant called Jonathan’s Barbecue, Inc. We’ll keep it simple and assume that he doesn’t own the building or property. Instead, he is simply renting space. After operating for several years, many of his customers suggest he begin to do catering. He hires a marketing company who designs a new logo for his catering business. Jonathan is up and running, however the name differs from his restaurant Jonathan’s Barbecue, Inc. Jonathan chooses to file for a DBA for the new line of business “Jonathan’s Catering.”
In this case, if at some point in the future a terrible accident occurs while delivering the catering services under the Jonathan’s Catering line of business, all of the assets owned by Jonathan’s Barbecue, Inc., as well as its income, would be in jeopardy. The reason for this is the DBA “Jonathan’s Catering” is merely another asset owned by Jonathan’s Barbecue, Inc.
If Jonathan wanted to separate the liabilities (the risks) in the two lines of business (his Barbecue, Inc. restaurant and catering), he should consider forming another business entity (an LLC, corporation or partnership) for the catering business
What are the Benefits of Registering a DBA for your business?
- Compliance: Filing or registering a DBA allows you to legally use a business name without incorporating as an LLC or corporation.
- Business banking: Filing a DBA enables you to get a business bank account in the name of your business and take payments in the name of your business, even if you haven’t formed an LLC.
- Flexibility: DBAs are easy and affordable to file, so they offer great flexibility to suit the needs of your expanding, evolving business. For example, if Jane Doe Cookbooks, LLC launches a new website, they can file a DBA for “JaneDoeCookbooks.com” which would keep that site’s business activities covered under the umbrella protection of the original LLC. If Jane Doe Cookbooks, LLC starts offering private chef services, online cooking classes, or starts selling cooking supplies, they could easily file DBAs for each of these new ventures under the same overall LLC.
What are the limitations of filing or registering a DBA?
- Filing a DBA is not the same as trademark protection: If you file a DBA, you have the right to use a business name, but you don’t have the right to prevent anyone else from using that same business name. If you want a higher level of protection, you need to register a federal trademark.
- Lack of tax benefits: A DBA is not a corporation, so merely filing a DBA that is not part of a “corporate umbrella” like an LLC will not give you any special tax benefits. If you are “only” doing business as a DBA, any money your business makes passes through to your individual tax return and is taxed accordingly. If you want to get the tax benefits that go with having a corporate structure, you would need to form an LLC and file taxes as an S-Corporation (or other corporate entity, which has different tax treatment). Be sure to consult with your attorney and/or professional tax adviser before you make a final decision on a choice of business entity structure.
Filing a DBA can be a fast and effective option to make your business “official” while providing certain benefits, but be sure you are aware of the limitations of this business name designation.
As with so many other business decisions, the fastest, cheapest solution is not always the best. But filing a DBA can be helpful for structuring multiple businesses as long as they are all integrated under an overall LLC or other corporate umbrella.