Thursday, February 22, 2007

Ditch the DBA

For most businesses, doing business under an assumed name certificate filed with the county makes as much sense as using a rotary telephone. It may get the job done, but it is has many drawbacks and there are far more attractive alternatives.

Lets start with the basics. An individual can file an assumed name certificate with the county that allows that person to do business in the county under an assumed name. The form is simple and the filing fee is small. That may sound appealing until you realize that there are few benefits, and many downsides, to structuring your business in this method.

One significant drawback to an assumed name certificate is that it does not provide the business owner with any limited liability protection. In contrast, for businesses that are formed in a way that provides limited liability protection, such as corporations and limited liability companies (“LLC”s), you are not personally liable for most debts and obligations of the business. If you do business under an assumed name filed with a county, you do not have this protection. You are the business, the business is not considered a separate entity, and you are liable for the obligations of the company.

In the past, using a business that provided limited liability protection, such as a “C” corporation, meant also having the cost of “double taxation,” meaning that income was taxed upon receipt by the corporation, and taxed again on distribution to the owners. However, there are now many forms of entities, such as S Corporations or LLCs, which allow a business to have true limited liability protection and enjoy the benefits of “partnership” or “flow-through” style taxation, as opposed to traditional “corporate” style taxation.

There are many other advantages to using a company that provides limited liability protection, such as an LLC, including the ability of the company to continue in existence after the death of an owner, increased options for succession planning and integration with an owner’s estate plan, potential options for tax planning, and value in the form of perceived legitimacy from third parties when dealing with an established company. Also keep in mind that businesses operating an assumed name should file the certificate in every county in which they transact business, in contrast to an LLC or corporation which is protected by a single statewide filing.

If you are a business owner currently using an assumed name certificate filed with the county and you have questions about converting to a more favorable form, or you are considering starting a new business and you have questions about choosing the proper form, I encourage you to contact me or your local trusted business attorney.

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