What you don't know about DBAs can hurt you and your business

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."

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. One good thing about forming an LLC for your business is that you can reduce the 15% Self-employment tax you pay as a sole proprietor.

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.