Published By Janet Gershen-Siegel at August 28, 2017
Do you know what you should know about DBAs and the awe-inspiring potential they have for your business?
Before going any further, you are probably wondering just what a DBA actually is. DBA stands for ‘doing business as’, and it is a fictitious name filing for your small business. It’s also called an assumed business name.
If your name is John Smith, you probably do not want your business to just be called ‘John Smith’. And this is particularly when you are trying to create a business which will build a business credit score.
When looking at business credit score vs personal credit score, a lender is going to become awfully confused if your name and the name of your business are identical. And this is particularly if you are a sole proprietor.
When business and personal credit are mixed, what affects business credit score the most is when your business credit score building activities end up not helping out your business at all.
So take the confusion out of the equation. This means meaning certain that the credit scoring bureaus, the Internal Revenue Service, and your lenders and creditors all know that you and your small business are two separate entities.
For a one-person operation, you might have a company name. But the general public does not necessarily know who you are.
So for example, if the name of your business is Mimi’s Flowers, then you will need a DBA. This is because there is probably more than one person named Mimi in your area.
But if you call your business Mimi Smith’s Flowers, you might be able to get away without a DBA. Still, it would not hurt to have one.
The public has a vested interest in knowing who actually owns which business. This is due to liability issues. So if you own a food truck and someone gets food poisoning, they won’t know you own Mayfair Mac ‘n Cheese without a DBA.
And it’s also for tax issues. I’ll get to those in a moment. And it’s even for business credit issues. I’ll get to that, too.
According to FreshBooks, a DBA lets the public know who’s running the show.
The SBA defines a sole proprietorship as an unincorporated business. Such a business is owned and run by one person. There is no material difference between the business and the owner.
This means that you, the owner, will enjoy all of profits. But you are also responsible for all your business’s debts, losses, and liabilities.
By separating out your personal life and credit from your business life and credit, you can protect your personal assets.
Otherwise, if the business goes bankrupt and there aren’t enough funds to pay its creditors, then guess what? Your business’s creditors will come after your car, your boat, your money, etc.
So there would be no personal protection without a DBA.
The Internal Revenue Service treats a DBA as an extension of a sole proprietor. Therefore, there is no need for a separate EIN for the business. An EIN is an employer identification number, sometimes also called a TIN, or a tax ID number. These are references to the same thing, a nine-digit identification number.
If you do not file for a DBA as a sole proprietor, then your personal name is the same as the small business name. Hence, you can wind up being personally responsible for all business debts.
Also, per the IRS, using this arrangement there is a 1 in 7 chance of an IRS audit. There is a 1 in 50 possibility for corporations! Avoid confusion and dramatically reduce the chances of an Internal Revenue Service audit at the same time.
But what if your business is a corporation or an LLC (limited liability corporation)? If it is, then the IRS already considers those to be separate entities. Those kinds of business configurations will need EINs and that will alleviate the need for a DBA.
Visit the IRS website and get an EIN for the company. They’re totally free. Choose a business entity such as corporation, LLC, etc.
A small business can begin as a sole proprietor. But you will probably wish to switch to a variety of corporation or partnership to minimize risk and maximize tax benefits.
A business entity will matter when it comes to tax obligations and liability in case of litigation. A sole proprietorship means the owner is it when it comes to liability and tax obligations. No one else is responsible.
When you operate a business by yourself you can continue the confusion. This can happen if you commingle the accounts. Or it can happen if you float your business a loan without interest. And another way is if you sign checks from your own accounts versus a business account.
When you apply for business credit, lenders and creditors will naturally look to your personal credit because that invariably has been around for far longer.
With a DBA, you can still be a one-person show. But it is one (of many) indicators that you have a business and not a hobby. And that your business should be treated as a business. It also means it’s time to start building business credit.
Business credit is credit in a business’s name. It doesn’t connect to an owner’s personal credit, not even when the owner is a sole proprietor and the sole employee of the corporation. Thus, an entrepreneur’s business and consumer credit scores can be very different.
Since company credit is distinct from personal, it helps to secure an entrepreneur’s personal assets, in the event of court action or business bankruptcy. Also, with two separate credit scores, a business owner can get two different cards from the same merchant. This effectively doubles buying power.
Another advantage is that even start-ups can do this. Heading to a bank for a business loan can be a formula for frustration. But building corporate credit, when done correctly, is a plan for success.
Personal credit scores depend on payments but also other components like credit usage percentages. But for corporate credit, the scores truly merely hinge on if a corporation pays its debts in a timely manner.
Building small business credit is a process, and it does not occur without effort. A company will need to proactively work to establish small business credit. That being said, it can be done readily and quickly, and it is much faster than building individual credit scores.
Merchants are a big aspect of this process.
Carrying out the steps out of order will cause repetitive denials. No one can start at the top with corporate credit. For example, you can’t start with store or cash credit from your bank. If you do you’ll get a rejection 100% of the time.
A small business has to be credible to lending institutions and vendors. As a result, a corporation will need a professional-looking web site and e-mail address, with site hosting from a company such as GoDaddy.
Plus company phone and fax numbers ought to have a listing on 411.com.
In addition the business telephone number should be toll-free (800 exchange or the like).
A company will also need a bank account devoted solely to it. And it has to have every one of the licenses essential for operation. These licenses all have to be in the accurate, correct name of the company. And they must have the same business address and phone numbers.
So bear in mind that this means not just state licenses, but potentially also city licenses.
It is quite simply the easiest way to register your business. If you knit tea cozies and sell them on Etsy, then you will have a storefront with a legit business name.
You will need a DBA in order to be able to open up a business account in your company’s name. And you’ll need it to receive payments or pay bills.
For your one-person operation on Etsy, it’s a lot more impressive if you can call it Dragon Tea Cozies. That is, rather than Sarah Smith’s Etsy store. And your company will look larger!
You can even use a DBA to operate several separate businesses at once. You can actually create a corporation which will use the DBA. This is useful if you open new branches or websites.
So your Friendly Corporation might be doing business as Dragon Tea Cozies, Mimi’s Flowers, and Good Vibes Night Club. And this is all at the same time.
Another use for these kinds of multiple DBA situations is when one business is incorporated and another is not. If you use a different name when signing contracts or leases, you might lose protections from being incorporated.
But by using a DBA structure, you should be fine. This is because it makes it clear to all and sundry that it’s a corporation doing business. And corporations have various legal and tax protections.
A DBA adds professional cachet to a one-person operation. Tell your company’s story about when you used what you should know about DBAs.