I recently talked to an electrical contractor I use frequently. He’s a great guy – smart, talented, hardworking. He’s the guy I always call when I have a problem. I told him about opening my law firm and he said that he would use me when he was ready to incorporate his business.
I was dumbfounded. He’s successful. We’ve been using him as our electrician for over eight years and he has a steady stream of clients and work. He’s spent years creating his client base, earning his reputation.
And he’s doing it as a DBA. DBA means “Doing Business As”, a sole proprietorship. Essentially, it’s creating a fictitious name under which you transact business. And that’s the problem. It’s only a fictitious name. There’s nothing that can protect you.
When you are a small or medium size business owner, the first thing you need to do is either create a corporation or form a limited liability company. Sometimes people think they don’t need to do that because the business is small.
The question about whether or not to incorporate or form an LLC isn’t the size of your business, but the size of the risk. When you operate a business as a DBA, your entire life is at risk. All of your earnings and your assets are potentially recoverable in a lawsuit. You can lose your house, your children’s college tuition, your retirement. There is no buffer between you and your business; the law considers you the same.
The problem isn’t any better if you’re operating as a general partnership with another person. In fact, the issue is compounded. Now you are personally liable for the actions of your partner as well. Even those you didn’t participate in.
Not so if you have a corporation or an LLC. In those instances, you have a shield. If creditors or others seek recovery, they can only take assets from the business. Your personal assets are protected in nearly all instances.
Having insurance for your DBA/sole proprietorship helps mitigate the risk, but doesn’t cure it. We read all too often that juries award large verdicts, often over and above coverage limits. And insurance companies are notorious for not wanting to pay out the full limits of the claim, if at all. Insurance should be icing on the cake, not the cake itself.
Creating a corporation is quick and easy. It is relatively inexpensive here in New York State. Limited liability companies have some additional flexibility (particularly when it comes to revenue and accounting provisions) but can be more expensive to form in New York State due to the publication requirement. All of those expenses are worth it for the protection the corporate entity provides.
Don’t put your personal assets at risk. A small investment in the formation of a corporation or limited liability company up front can make all the difference. Speak to an attorney who can help you protect you and your family. You are worth it!
The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.