New Business Entity vs. Using a DBA
When purchasing an existing company, buyers often face a critical decision: should they set up a new business entity or operate under a “Doing Business As” (DBA) name? Both options have distinct legal, tax, and liability implications. Understanding these differences can help buyers protect their assets and maximize tax advantages.
- Understanding a DBA vs. a New Business Entity
A DBA, or “Doing Business As,” is a registered business name that allows an individual or existing entity to conduct business under a different name without creating a separate legal entity. A DBA does not provide liability protection or tax benefits beyond those available to the individual or parent company that owns it.
On the other hand, forming a new business entity—such as a Limited Liability Company (LLC), Corporation (S-Corp or C-Corp), or Limited Partnership—creates a legally distinct entity separate from its owners. This structure provides liability protection and can offer tax advantages depending on the entity type.
- Tax Differences Between a DBA and a New Entity
DBA (Sole Proprietorship or Part of an Existing Entity)
- A DBA itself does not have a separate tax identity; taxes are filed under the owner’s personal tax return.
- If an individual operates under a DBA as a sole proprietorship, all business profits and losses pass through to the owner’s personal tax return and are subject to self-employment taxes.
- If the DBA is under an existing LLC or Corporation, the business income is taxed according to the structure of that parent entity.
New Business Entity (LLC, S-Corp, C-Corp)
- An LLC offers pass-through taxation, meaning profits and losses pass to the owner’s personal tax return, like a DBA. However, an LLC can elect to be taxed as an S-Corp, reducing self-employment taxes.
- An S-Corporation also provides pass-through taxation but allows owners to receive part of their income as distributions, which are not subject to self-employment tax.
- A C-Corporation is taxed separately from its owners, meaning profits are taxed at the corporate level, and any dividends distributed to owners are taxed again (double taxation). However, C-Corps may offer lower corporate tax rates and benefits like retained earnings.
- Liability and Legal Protection
One of the biggest differences between a DBA and a new entity is how liability is handled.
DBA (No Liability Protection)
- A DBA offers no legal separation between the business and its owner.
- If the company faces a lawsuit or accrues debt, the owner is personally liable, meaning personal assets such as homes and bank accounts could be at risk.
- If the DBA operates under an existing LLC or Corporation, liability protection comes from the parent entity, but only if corporate formalities are maintained.
New Business Entity (Liability Protection)
- An LLC, Corporation, or Limited Partnership creates a separate legal entity, shielding the owner’s personal assets from business debts and lawsuits.
- If the business is sued or defaults on debts, the owner’s liability is typically limited to the amount invested in the company.
- Business entities provide stronger legal protection against liability claims compared to a DBA.
- Which Option Is Best When Purchasing a Company?
Use a DBA If:
- The business being purchased is small, with minimal risk of liability.
- The buyer already has an established business and wants to add a new trade name without creating a separate legal entity.
- The priority is to simplify administration and reduce paperwork.
Form a New Business Entity If:
- The purchased business involves significant liabilities, contracts, or employees.
- The buyer wants to protect personal assets from potential lawsuits or debts.
- The business has long-term growth plans that require a structured entity for funding and tax efficiency.
While a DBA is a simple and cost-effective way to operate a business under a new name, it does not provide liability protection or tax benefits beyond what’s available through the owner’s existing tax structure. In contrast, setting up a new entity can offer greater legal protection and tax advantages, making it a better choice for buyers who want to mitigate risks and maximize financial benefits. Before deciding, consulting with a legal or tax professional is advisable to ensure the chosen structure aligns with the buyer’s business goals. We do suggest an attorney who is familiar with this industry. One option would be Ken Kirschenbaum of Kirschenbaum and Kirschenbaum – 516 747 6700 x 301, ken@kirschenbaumesq.com, www.KirschenbaumEsq.com