What you should know about DBAs

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What you should know about DBAs

Published By Janet Gershen-Siegel at August 28, 2017

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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 (also called an assumed business name) filing for your small business. If your name is John Smith, you probably do not want your business to just be called ‘John Smith’, 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, particularly if you are a sole proprietor. When business and personal credit are mixed, what affects business credit score the mostis 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.

Why a DBA?

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, as 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. 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 (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 also tax issues (I’ll get to those in a moment) and business credit issues (I’ll get to that, too). According to FreshBooks, a DBA lets the public know who’s running the show.

Sole proprietorships

The SBA defines a sole proprietorshipas an unincorporated business 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. However, 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, your business’s creditors will come after your car, your boat, your money, etc.

Satisfying IRS requirements

The Internal Revenue Service treats a DBA as an extension of a sole proprietor. Therefore, there is no need for a separate EIN (employer identification number, sometimes also called a TIN, or a tax ID number) for the business.

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 alleviate the need for a DBA.

Separating Business and Personal Credit

When you operate a business by yourself and you commingle the accounts, you float your business a loan without interest, or you sign checks from your own accounts versus a business account, you continue the confusion. When you apply for business credit, lenders and creditors will naturally look to your personal credit because that invariably has been established 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 business should be treated as such.

More Reasons to Get a DBA

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 receive payments or pay bills. For your one-person operation on Etsy, it’s a lot more impressive (your company will look larger) if you can call it Dragon Tea Cozies rather than Sarah Smith’s Etsy store.

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, 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 the protections you get from being incorporated. But by using a DBA structure, you should be fine, as it makes it clear to all and sundry that it’s a corporation doing business – and corporations have various legal and tax protections.

The steps for getting started with a DBA vary from state to state, so check your Secretary of State’s website for the details. For example, in Massachusetts, you go here. In Colorado, here.

A DBA adds professional to a one-person operation.

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