What is a DBA?

What is a DBA?

Do you really know what is a DBA?  

A DBA is easy to do, but has a lot of consequences of which you may not be aware.  It is something important you need to understand before your California LLC formation or S Corporation formation.

First, DBA stands for Doing Business As.

A DBA is also nearly the same thing as a Sole Proprietor.  Jon Doe running a restaurant called Jon’s Pizza is a DBA aka sole proprietorship.  This just means that you, one person, has started running a business.   The State may require that you file some simple paperwork to register your business.

Any Tax Savings With A DBA?

What is a DBA and what taxes will you pay on any profits earned?

Well, as with many things with a DBA, filing your taxes is also easy.  You just attach what is called a Schedule C to your regular tax form.   Most tax software will have this and you will be prompted to enter your business earnings and any money spent on the business.  Any expenses will be a tax deduction.  It won’t really cost you much more, if any, to do your taxes.

The tradeoff of the DBA is that is easy to form and easy to use.

However, there are really very few tax savings to gain by operating a DBA.   If fact, you will have to pay something called Self Employment or Payroll Taxes, which are a whopping 15.3%.   That is even on top of your Federal and State Taxes.  Holy Cow.

Payroll Taxes: How does THAT work?

As you know, when you work for someone and receive a salary, you have those FICA taxes taken out of your paycheck.   Not fun.   If you must know, FICA stands for Federal Insurance Contributions Act.

These are the Social Security and Medicare taxes that you pay on 7.65% of your salary (in 2013).    However, this same amount is also paid by your employer.  That means that a total of 15.3% is paid to the Feds each time you get a paycheck.

You don’t feel it so much when you are paid a salary because you only pay half and your employer pays half.  The 15.3% doesn’t seem so harsh since you don’t pay the full shot.  But what if you’re the boss?

Do you see where this is going?

Now, as a DBA or Sole Proprietor, you have to pay the full 15.3% of your profits because you are both the employer and employee of your business.   Now that hurts.   That means that you will have to pay 15.3% of your profits plus Federal and State taxes.

There is a bit of relief.

You can use as a tax deduction the employer’s portion of the 15.3% of the FICA taxes you pay.

In other words, you pay FICA taxes of 7.65% as the employee, another 7.65% as the employer and then you get to deduct 7.65% off your taxes.  It’s not much, but it is something.

But, that is just how it is.  The only to save yourself a lot on these taxes would be to do a California LLC formation or S Corporation formation.   Even so, sometimes it’s best to keep things simple until your business gets going.   If your business is just starting out and not earning much, you won’t be paying much in taxes anyway.  But what about protecting your hard earned money?

Liability Protection

Is a DBA business separate from you personally?  No.  You and your business are one and the same.

Now in some cases, this can work just fine in the beginning.  If you don’t earn much money and your business does not appear likely to be involved in a lawsuit, then sometimes a DBA or Sole Proprietorship is acceptable to run your business.

One downside to a DBA is that you have NO liability protection.

Since you and the business are one, then if you or your business are sued, then you and your business can be plucked for money.  This means the person suing you can recover from both your personal bank accounts, your home and any business assets you have.  If you have a very small business with little money, then they will go after your personal assets.

If you bake cupcakes on the weekends for extra cash, you might not earn a lot of money and you may not feel like you’d need liability protection.

But what happens if your butter spoils and several people at a party eat your cupcakes and become ill?  That’s a problem.  Now the people who got sick can sue your small business.   Since it does not earn much, they will then want to sue you personally to get your house, bank accounts, stocks and any other personal assets.

This is why you should always keep liability protection in mind.   This really just means saving your hard earned money.  One way to do this without a LLC or S Corporation is to have a few types of insurance.

Insurance

If you do not have a California LLC formation or a Corporation, and you continue to run your business as a sole proprietor, then you should at the very least, have insurance which can protect your money and assets.   General Commercial Liability Insurance can save your assets if someone trips and falls where you do business.  This insurance can be inexpensive.  It is also a tax deduction.

A personal umbrella policy may also save your money and assets in the event you are sued.   What would happen if you have an auto accident and your insurance has a $100,000 limit on injury?   Well, you’d have to pay anything over $100,000, unless you have an umbrella policy, which would pay it for you.   This can also very inexpensive and may also be a tax deduction.

As you can see, it is wise for you to ask what is a DBA.  Knowing the answer could save you a lot of grief and perhaps tax money.   Reflecting on this sometimes means separating you from your business by forming another type of business such as a LLC or S Corporation.

Whether you are a DBA or have done a California LLC formation, you should seriously consider purchasing insurance to save your money and assets.   Especially if you are running a business as a DBA.

Finally, Will You Make This Big Mistake?

Do you know you may accidentally form a partnership rather than a DBA?    And do you know you are liable for your partner’s debts?   I will discuss this in more detail in a post about partnerships.  It is worth the read.

 

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