What is a DBA? The Pros and Cons of Filing “Doing Business As”
DBA stands for “doing business as,” and it’s something you might consider for your business if you prefer not to use your real name or registered business name. Most states require you to register a DBA, and the process is fairly simple. Before you file for a DBA, it’s important to weigh the pros and cons.
The Pros and Cons of DBAs
Pros
- Increased Flexibility
- Privacy Protection
- Targeted Branding
- Easy Legal Compliance
Cons
- Fewer Tax Benefits
- Fewer Liability Protections
- No Exclusive Rights to the Business Name
- Maintenance
The most common example of a DBA is when a sole proprietor wants to run a business under a different name—either to protect their privacy or to obtain a better business name. However, there are several ways for businesses to benefit from using a DBA.
What is a DBA?
Before breaking down the pros and cons of a DBA, it would be helpful to explain a little more about what it means to register a DBA for a business owner.
A DBA is essentially an alias. For example, if you’re a sole proprietor working as an accountant, and don’t think that doing business as “John Smith” will give you a marketing edge, you can set up a DBA to operate as “Smith & Sons Accounting Firm.” Similarly, if your legal name is Robert Smith, you will probably get more customers operating your business as “Bob the Plumber”—as opposed to using your legal name.
These business-like names sound better than the legal names of these sole proprietorships. In most states, you cannot just call your business whatever you want without filing the right paperwork for a DBA. A DBA will also allow you to open a business checking account and list your business on helpful directories like Google and Yelp.
You will need to indicate the name of your DBA on your tax return, though the way you will pay personal and business taxes depends on the legal structure of your business—whether it’s an LLC, Sole Proprietorship, Partnership, or Corporation. Any of these different business entity types could operate a business or several lines of business with a DBA.
Many states require a DBA to be filed so consumers are not misled by a fictitious or alternative business name. In most states, all you need to do is contact the county clerk’s office and pay a small fee which is typically less than $100. Some states require you to place an advertisement in the newspaper giving notice of your DBA. Many banks will require a fictitious name certificate in order to open a business account.
It’s important to understand that a DBA is not an LLC (Limited liability company). It does not separate you and your personal assets from your business—it just allows you to legally operate under a different name. To that end, while it may offer you privacy or greater marketing power, it does not offer you much in the way of legal protection.
The Pros and Cons of DBAs
Now that we’ve taken a look at what a DBA is broad terms, let’s get more granular and examine the benefits that DBAs offer—and some of their inherent problems. Let’s start by examining the pros of a DBA, which include increased flexibility, privacy protection, enhanced brand value, and ease of legal compliance.
Pros of a DBA
1. Increased Flexibility
If you already own a business and want to expand your business into other areas, a DBA can facilitate that expansion, whether it involves expanding geographically or opening a new line of business. For example, if you own a company called “Restaurants Incorporated LLC,” obtaining a DBA can allow you to open several restaurants, each under a different name.
“Restaurants Incorporated LLC” may not sound like a trendy place to eat, but “John’s Burger Shack,” “The Upscale Steak House,” and “Grand Old Salad Buffet” sound much better. It’s the DBA that allows your business to open these various branches of your operation using a variety of names.
If your business were to expand into a region where someone else already has registered your business name, a DBA can allow you to register a different name in that area and operate under that alias. If you want to enter a totally new line of business, a DBA can also facilitate that as well. There are plenty of companies who operate a variety of brands with a DBA, while the parent company oversees them all.
2. Privacy Protection
If you’re operating your business as a private individual—either as a sole proprietor or as part of a partnership—then a DBA can protect your privacy. If you advertise your real name all over town, you’ll find catalogs and postcards filling up your mailbox in no time. Your phone will begin ringing off the hook—not from customers, but because everyone is trying to sell your “business” something it needs. It won’t be long until you’ll wish you had set up a DBA. To that end, there are some businesses that would not want the privacy protection of a DBA, such as a real estate agent or motivational speaker.
3. Targeted Branding
Another benefit of DBAs is the potential for branding in different target markets. If your company (however it’s structured) has different lines of business, you can use DBAs to create different brand names that target specific clients. For example, if you sell home goods online, you can create different websites and brand names for your furnishings, kitchenware, and linens.
If you’re operating as a sole proprietor or partnership, your own name(s) will not have much marketing power beyond the people you know—unless you’re famous. A DBA allows you to set up a business name that will carry more appeal for potential clients. It will make it easier to brand and market your business with a logo that goes with the business name.
4. Easy Legal Compliance
A DBA is not required in every state—but most states do require it. You don’t want to get caught operating under a fictitious name without actually setting up a DBA. You never know when one botched transaction or irate customer could turn into a lawsuit that incriminates you for fraud.
The process is as simple as contacting your local clerk’s office or the recorder’s office for a DBA certificate. The DBA filing requirements and fees vary by state, but the process of registering a DBA is simple and straightforward. You may also have the option to file online.
In some jurisdictions, the county recorder’s office might refer to DBA registration as a “fictitious name filing,” “fictitious name registration,” or an “assumed name certificate.” If you want to know the exact process of how to file, you can visit the official website of the state where you do business.
Cons of a DBA
Now that we’ve looked at some of the pros of a DBA, let’s look at the cons, which include fewer tax benefits, fewer liability protections, lack of exclusive right to the business name, and the need for routine maintenance.
1. Fewer Tax Benefits
Unfortunately, a DBA does not actually create a business; it just creates an operable name. In fact, you cannot even use terms like “LLC” or “Corporation” in your DBA—so your personal liability is still at stake. A DBA offers none of the tax strategy afforded by other business types. In order to understand the ins and outs of this point, it’s best to consult a professional tax advisor.
2. Fewer Liability Protections
A DBA is all about operating your business under an alias. It does not separate you from your business—or protect you from lawsuits. In contrast, other business structures like an LLC (limited liability company) provide you with much more protection and security.
Regardless of what type of business you own, you will want to make sure your personal assets are separated from your business. If they’re not, then clients and customers can sue and end up taking your personal liquidity and even property. A DBA will not offer personal asset protection the way an LLC can.
3. No Exclusive Rights to the Business Name
A DBA should not be confused with a trademark. While a trademark grants you the exclusive right to use a particular name for your business, a DBA simply allows you to operate under that name. In fact, in some states, several businesses can actually use the same name.
While a DBA costs around $50 in most states, filing for a trademark costs several hundred dollars and is a lengthy process. However, it may be worth it to trademark business names you’re using before someone else does.
Also, DBAs often cannot be used for legal paperwork, which can result in some pretty annoying confusion when you’re trying to seal a business deal or fill out legal documents.
4. Maintenance
Some states will require you to register your DBA name in every county in which you’ll be doing business. This is a time-consuming process, even if your state has an online business portal. Since you will also have to renew your DBA every few years, be prepared to frequently repeat the process of registering your DBA in every county you serve.
Is a DBA Right for My Business?
Whether or not a DBA is right for your business depends on a variety of factors, including the type of business you own and what goals you have for your business. For example, if you’re a handyman who is content to roll around town with your name painted on the side of your white van, you may not need a DBA. But again, if you have a trendy logo and a catchy business name, you’ll get a lot more positive attention as you roll around town.
If you operate several types of businesses which could create some confusion for potential customers and cause you to lose out on sales, you may want to set up a DBA to segment your operations and strengthen your branding. For example, parents of young children might not want their kids to see a feature film released by Touchstone Pictures, but Disney is just using a different name. Likewise, if you’re selling musical instruments, motorcycles, and generators, you may want to create a DBA for each of these lines of business to avoid market confusion.
What’s the Difference Between a DBA and LLC?
While the cost for filing a DBA is lower, it carries none of the legal protection offered by an LLC. For example, if you own some rental properties, you may feel fine managing them with a DBA, instead of using your personal name—until something adverse happens at one of your properties.
Your DBA will not protect you from lawsuits filed by irate tenants, neighbors, or anyone who gets injured on your property. A DBA does not eliminate your personal liability in relation to your business activity—which is definitely something you want to do, whether you’re selling homemade jam or high-end consulting services. The best thing you can do is talk to a professional advisor about setting up an LLC.
An LLC also gives you a legal hold on a registered business name in your state, preventing another business from using the same name (though they could register the name in a different state). If you have an umbrella company with several lines of business, and that business already has an LLC, you may not feel it’s necessary to obtain an LLC for each line of business. In these cases, a simple DBA may suffice. Keep in mind, however, typically a DBA cannot prevent other businesses from appropriating that business name and taking it for their own—perhaps even trademarking it and preventing you from using it.
If you’re not sure whether to file for a DBA or an LLC, you might be able to kill two birds with one stone by filing for an LLC. You can call the LLC whatever you’d like, effectively achieving what you would get with a DBA—plus you’ll legally separate yourself from the business as well, with the inherent structure of the limited liability company. This is especially true if you want your business to be its own entity that’s entirely separate from you, which will also help reduce your risk and liability while running your business.
DBAs, LLCs, and Tax Strategy
When it comes to taxes, an LLC with a single owner is considered a disregarded entity. Any income your LLC makes will go straight to your individual tax return because the LLC is subject to pass-through taxation. If you are a sole proprietor using a DBA, your business is also considered a disregarded entity by the IRS. Whatever income your DBA makes will pass through to the tax forms you file for yourself.
To leverage some business-related tax strategies, you’re better off looking into forming a partnership or a corporation. Select types of business structures like an S corporation might yield the perfect balance between tax strategy and liability protection for small businesses owners. However, since organizing a corporation comes with a certain set of requirements, you might want to carefully weigh what type of business entity is best for your business. There are several choices, each with their own pros and cons: sole proprietorship, limited partnership, limited liability company, and a corporation, for example.
A competent business planning and consulting firm like Anderson Advisors can give you legal guidance around how to properly file incorporation documents. Additionally, they can also offer assistance in improving the performance of other ancillary parts of your business, like small business bookkeeping.
The Pros and Cons of a DBA
A DBA stands for “doing business as” and it allows a business or sole proprietor to operate under a different business name. Some states may refer to a DBA as a trade name, a fictitious name, or a fictitious business. You can use a DBA to obtain anonymity, build marketing power, and operate several lines of business—but you cannot use it to legally protect yourself. It’s important to keep in mind that even a legally registered DBA does not reduce your liability or offer you asset protection.
A DBA offers some easily obtainable, inexpensive benefits. Without having to shell out hundreds or thousands of dollars to file for a corporation, you can make your business appear professional and attractive to customers. It’s a fairly cost-effective way to enhance your brand value.
The business that you file can help protect your privacy while complying with local laws about operating under a trade name. A DBA on file will also help you obtain some flexibility, whether you’re expanding geographically or into other areas of business. If you want to open a new line of business without confusing clients and customers, or weakening trust in your brand, you can file for an assumed name certificate to branch out quickly and easily. The deal is even better if your business is already an LLC—you won’t have to file for several new LLCs if you want to expand your business under a different name.
At the same time, a DBA has several disadvantages. It does not offer any particular tax benefits or tax strategies, because it’s really just the title of your business and not the legal structure. When you file for a DBA, you don’t secure any protection from personal liability. You don’t obtain any exclusive rights to the name—someone else can come along, take the name, and trademark it. Also, keep in mind that a DBA requires some periodic maintenance, and in select states, every few years you’ll have to file a DBA in each county where you do business.
As a business owner, your goal should be to do whatever provides the most tax advantages and legal protection while creating the least headache. To that end, if you’re considering how to formalize and register your business, you should seek qualified legal advice from a firm like Anderson Advisors. We can help determine which business entity is best for you. Contact us today for a free consultation.
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