Why a DBA Won’t Protect Your Business

by Matthew Burgess on October 5, 2009

What lesson have so many sole proprietors found out…the hard way?

Why is a DBA just not enough to protect yourself and your business?

Many entrepreneurs decide to file a Fictitious Business Name / DBA for their business, and then run it as a sole proprietor, to save a few bucks on forming a corporation or LLC. 

headacheI want to share a story…of an entrepreneur who worked hard, built a decent business, and yet lost it all, just as things were starting to grow.

The real heart-wrenching thing is that it never had to happen

The story is far too common, but you may never hear it because these failed businesses just fade away quietly, unable to fight back against a situation that didn’t have to be.

It’s a story that I wish I would never hear. But we hear it all too often.

I started my business to follow my dream,
and it’s become a nightmare.

I love doing the work I do; it’s my passion. But things have been a little slower lately, and we got a little behind on paying one of our vendors.

They were getting a little testy, so I went over to their offices to talk to them. I explained that we’d make the payments and be caught up by next month.

I was hoping to get a little sympathy/leeway, so I told them how we just bought a condo, and how the mortgage payments were making things a little tighter.

“You understand, right?” He seemed to: “Yeah, tough times all around,” he said.

He wanted to know a little about our business so that they could “feel comfortable” about our promise to pay.

I explained that we have a couple clients that are behind on paying us, but that we’re supposed to get those payments this week.

He asked “Well, what if they don’t pay this week, as planned? Then what?”

So I told him that my father, who’d loaned me the startup money for the business, was going to loan the business a little more. When I get that loan, I told them, I’d be able to send a check, for sure.

We closed up the meeting on a friendly note, talking about our kids’ soccer team, and it seemed like everything was fine.

Then, a couple days later, we’re working in the office and a messenger comes in with an envelope for me. As I opened it, I wasn’t quite sure what it was. It looked like some sort of legal document.

Then suddenly, I understood. It was a lawsuit. Our vendor was suing us. As I grabbed a chair and read through the complaint, I felt like I’d been punched in the gut. They were saying all sorts of nasty things about us.

We owed them less than seven thousand dollars, but his suit was for $76,500!

There was all sorts of legal mumbo jumbo about damages, loss of business, willful this-and-that and who knows what.

I never would have thought this could happen to my business.

But when I flipped back to the front page, the real gut punch came. I read the front page again, and realized that they weren’t suing the business.

dataflow-sThey were suing me. Me, personally.

And it got worse. My name wasn’t the only one there. Under my name was my husband’s…and under his name, was my father, and even my mother!

My husband doesn’t have anything to do with the business. (Other than being an awesome, supportive guy, of course.) So how in the world does he get involved in this lawsuit?

And my father and mother…what?!

Well…so I talked with a lawyer. And he talked to the vendor’s lawyers.

He explained to me that they were going after our personal assets to pay for this. Our car, our condo, my parent’s house, whatever they could get their hands on!

I asked him how they could go after our personal assets, since this was a business. He explained that I was a sole proprietor.

I had filed a DBA. But since I never incorporated, there is no protection.

Since this is a marital property state, my husband is being sued also. As far as my Dad: they claimed that since I “disclosed” to them that he’d funded the business, that he was a party to the debt. And my mom got roped in as part of the marital property thing.

Wow. I couldn’t believe what I was hearing. I thought filing the DBA protected us from this kind of thing.

“I’m afraid not,” said the lawyer. “The DBA doesn’t protect you one little bit.”

If we’d formed a corporation or an LLC, then the vendor
could only go after the assets of the business

“Well geez,” I said, “we’d still have been in a spot. The business doesn’t have that much in assets, so the suit would put us out of business.”

“Well, I’m not so sure about that” said my attorney.
He said we might not have been sued in the first place if we were a corporation.

Seriously? This was getting surreal.

You see, the vendor knew we were a small business, with not much to go after. But when they heard about the condo and my father’s involvement, their lawyers got all bright-eyed and bushy-tailed.

If we were a corporation or LLC, they probably would have worked out a payment plan and made the best of it. But since I was a sole proprietor, they saw an opportunity to go after our personal assets.

This has been a heck of a learning experience. Not really an education I would have wanted, though, that’s for sure. I sure wish I’d found you guys before all this happened.

bg-content-img-02If you feel that you need the protection of a corporation or LLC, contact us, and we’ll help you get it formed properly.

And although Formation Solutions is here to form your entity–done right at the right price–please know it’s always important to seek the qualified legal advice of an attorney.

We’re not lawyers. We don’t just say that to cover our own hide: we say it because as entrepreneurs, we’ve learned again and again how invaluable good legal advice can be as you grow your business.

If you need help finding an attorney that can give you the legal advice you need, please let us know. We work closely with many great attorneys, and we can make a few introductions.

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  • http://maverickmoneymakersreview.ws/ Maverick Money Makers Review

    hello friend, That won't help protect your business from fraud if everything is waiting for the same person when they return to work!

  • http://www.AmericanFranchiseDream.com/free-franchise/ free franchise

    This is a heart touching story of great business. DBA is a fictitious name under which the business is conducted in the world is not the legal name of the legal person who actually own it and are responsible for it.

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