When discussing incorporation with people starting small businesses, I often hear a disturbing misunderstanding of the law. People say to me, “I have registered my business as a DBA with the state, I don’t need to incorporate.”
A DBA (a.k.a. “Doing Business As”, and in some states called a Fictitious Name registration) is definitely not the same as incorporating when it comes to protecting your personal assets from business debts nor does it get the same tax treatment as a corporation or Limited Liability Company (LLC).
When you run a business without incorporating (and by incorporating, that includes S-Corps, LLCs, or limited partnership), you are called a sole proprietor. From a tax standpoint, you and your business are one and the same. That can be good or bad depending on your precise circumstances.
In addition, from a liability standpoint, both you and your business are the same–whether you filed a DBA or not.
What is definitely not a good thing about being a sole proprietor is that your personal and business assets are considered one and the same. That means that creditors of your business-suppliers, the bank, someone who slipped and fell at your store-can take any of your personal assets. Your home, car, furniture, even the clothes off your back are all fair game to your business creditors. With the major changes to the law in 2005, don’t expect bankruptcy to protect you either.
Even with a DBA, You’re Still a Sole Proprietor
Being a sole proprietor is risky. That’s why so many people choose to incorporate their business as either a C-corporation or, more commonly in recent years, an LLC. By filing a DBA, all you’re doing is getting permission from the state to operate your sole proprietorship under a fictitious name-the fictitious name being the trade name of your business. You haven’t created a separate legal entity from yourself-you’re just able to do business as yourself under a different name.
The bottom line is that if you want to guard your personal assets with the limited liability protection of incorporation, you need to create your LLC.
A DBA is not enough when it comes to asset protection.