This begins a series of blogs about business entities. If you are doing business then your business is operating as a legal business entity of some sort—whether you intend it or not. Two of the basic forms of business entities do not require that you do anything other than start doing business for their existence to spring into being. The other two basic forms of business require that you do something in order for them to be created. The reasons for operating as one form of business or another have to do primarily with factors such as tax considerations and personal liability issues. However, often individuals are doing business as a Sole Proprietorship or a Partnership by default—that is because what they are doing falls within the legal definition of one of those entities, whether or not they have made a conscious decision to operate as that form of business. The basic forms of business are: Sole Proprietorship, Partnership, Corporation and Limited Liability Company.
Sole Proprietorship. A Sole Proprietorship is a business owned and controlled by one person who is solely liable for its obligations. I sometimes hear non-attorneys refer to this form of business as “a DBA”. What they mean is a Sole Proprietorship. As an example, solo recording artists who have not incorporated or formed an LLC are a Sole Proprietors (unless they have a partner in their career). Many incorporate portions of their business (touring activities, for example) and continue to act as Sole Proprietors in other areas of their business (such as recording). I have many business clients (personal managers, publishers and even independent record labels, etc.) who are operating as Sole Proprietors. They just start doing business with no formalities. They own the business and call all of the shots. They are responsible for all of the obligations of the business and reap all of the profits as well. In this form of business the law and the taxing authorities (IRS, etc.) do not distinguish the business from the individual who owns it. All net income is taxed to the individual at his or her personal tax rate. Should someone file a law suit because the business owes them money or because they were caused harm by the business, the owner (the Sole Proprietor) is personally liable for any recovery that the plaintiff might be awarded by the court. In plain English that means that if you are a sole proprietor whose business owes a debt of $10,000, you personally are responsible for that debt from your personal assets (savings account, home equity, etc.). Your creditor is not limited to the assets of your business for repayment—he or she can attach your personal property as well.
By the way—there is no such business entity as a “DBA”. “DBA” is merely a shortcut abbreviation for “doing business as”—such as “PKA” (professionally known as) and “AKA” (also known as). Any form of business (not just a sole proprietorship) can have one legal name but do business under a different name. I have many corporate clients who are known to the public by a name different than their true corporate name. This might come about for a variety of reasons. Often the sole proprietor, partnership, corporation or LLC has several different business ventures under one umbrella, each operating under a different name. Several years ago I owned an artist management company which was legally formed as an LLC under one name and later began doing business under another name. My reasons were that the business originally used the last names of the partners. When the identity of the partners changed we decided to begin using a name that did not identify the given names of the owners. Rather than change the name of the business (which can be done) we decided to simply file the appropriate papers with the Tennessee Secretary of State and start doing business under our new name— in Tennessee the "dba" name is known legally as an "alias".
Are you a solo practitioner? Next in the series will be a few words about Partnerships.