If you’re considering a DBA for your business, then you’re in good company.
Many sole proprietorships and general partnerships are adding these “doing business as” names to their companies, and you’ll even see limited liability companies (LLC) and corporations using them at times as well.
But if you’re unsure of what a DBA actually accomplishes, you may be in for an unpleasant surprise. Some well-meaning professionals believe that the DBA provides personal asset protection, but that’s not the case. With this guide, we’ll help you understand why.
What a DBA Is
A DBA is a way for a business to use a name that’s different from its legal name. For example, if Joe Norton owns a sole proprietorship, the name of his business is the same as his personal name, unless he files for a DBA, in which case he could operate under his preferred business name.
This is because sole proprietorships and general partnerships are not considered to be distinct entities from the people who own them ― the business is simply an extension of its owner’s personality, according to the law. Therefore, without acquiring a DBA or forming a formal business entity like a limited liability company (LLC), Joe Norton’s sole proprietorship is also known as “Joe Norton.”
DBAs are available to both formal and informal businesses, which means that LLCs and corporations can obtain them as well. In these situations, a formal business will usually get a DBA in order to separate different product lines for advertising purposes, or to keep certain parts of the company in their own areas when it comes to accounting.
The registration process for a DBA is essentially the same in most states, but sometimes registration is completed on the county level instead.
What Personal Asset Protection Is
Personal asset protection is a result of the corporate veil, which you receive when you form your business with your Secretary of State. This veil exists because with LLCs and corporations, there is a clear-cut separation between the company’s finances and the personal finances of the owners.
With the veil’s personal asset protection, the car, house, personal bank accounts, and other assets of the company’s owners cannot be claimed as collateral in a lawsuit against the business ― only the business assets are available to creditors.
The corporate veil can be pierced though, and if that happens, the personal asset protection will be lost. The piercing of a company’s corporate veil usually occurs if a court decides that a business owner committed fraud, or if there was not sufficient distinction between the owner and his/her business.
Unincorporated businesses ― like sole proprietorships and general partnerships ― do not have a corporate veil. Therefore, if these businesses default on a debt or get sued, creditors can pursue both the ownership’s personal assets and the company’s business assets equally.
Why Personal Asset Protection and DBAs Don’t Go Together
Unfortunately, the DBA does not have any bearing on whether or not a business has personal asset protection, as a doing business as name alone does not provide a corporate veil.
The primary reason for this is that a DBA does not affect the legal status of the entity. If your business was a general partnership before acquiring a DBA, it is still a general partnership afterwards, for instance.
The one and only thing a DBA actually does is provide the business with a degree of flexibility regarding how it can be advertised and represented. If you want personal asset protection for your company, you should form an LLC or corporation instead of getting a DBA.
In fact, this advice pertains to formal business entities and informal businesses alike. We mentioned earlier that you’ll sometimes see an LLC or corporation obtain a DBA as a means of keeping certain parts of the company separate from each other for advertising or accounting purposes. It’s important to note that the DBA has its limits in this area as well.
Even though formal business entities do have personal asset protection, separating segments of the company with DBAs actually does not shield each segment from the others when it comes to liability.
So, if you obtain six DBAs to separate six segments of your business, a lawsuit against one segment is still a lawsuit against the entire company, including all five other segments. If you want to separate different parts of your business for liability purposes, you’ll either need to form a series LLC or a corporation with subsidiaries.
How to Acquire a DBA
If you still think a DBA is the right choice for your business, you have a couple options when it comes to obtaining one.
The application process is quite similar in most states, as you’ll just need to provide the Secretary of State’s office with some basic information about your business, like your company name, your new assumed name, the physical street address of your business, the identity and location of your registered agent, and the names of your company’s owners.
For the most part, these rules are relatively consistent from state to state. Still, there are some states that have you apply for a DBA with the Department of Revenue rather than the Secretary of State, and there are also some areas where you’ll need to provide some more specific information. There are even seven states that require you to publish proof of your DBA in a newspaper after you acquire it.
If this all sounds like more of a hassle than you want to deal with, there are other options. Namely, you can hire a business services company to do it for you. With most companies, you’ll pay right around $100 for this service. If you’re interested in this option, check out our list of the 5 best DBA services.
The doing business as (DBA) name has more disadvantages than most people realize, in our experience.
While it is nice to be able to create alternate names for your company without having to form a formal business entity, the DBA does not provide personal asset protection, nor does it even extend this protection for businesses (like corporations and LLCs) that already have it.
At the end of the day, you should just form an LLC instead of acquiring a DBA. It might be slightly more hassle, and it might cost a little bit more, but the benefit of having personal asset protection is well worth it.