Unraveling the IRS Perspective on DBAs
When starting a business, many entrepreneurs choose to operate under a “Doing Business As” (DBA) name instead of their personal name or legal entity. A DBA, also known as a fictitious name, allows individuals to conduct business under a different name while maintaining their legal identity. However, it’s important to understand how the Internal Revenue Service (IRS) perceives a DBA and how it affects your tax obligations. In this article, we will delve into how the IRS views DBAs and what it means for your business.
Defining a DBA
A DBA is a trade name used by individuals or companies to conduct business under a name that is different from their legal name or registered entity name. It is commonly used by sole proprietors and partnerships, but can also be utilized by corporations and limited liability companies (LLCs) operating under a different brand or business name.
IRS Perspective on DBAs
From the IRS’s standpoint, a DBA is not a separate legal entity. Instead, it is simply a name or brand under which an individual or business operates. When you operate under a DBA, the IRS recognizes the individual or legal entity behind the DBA as the responsible party for tax purposes. In other words, the IRS sees a DBA as an extension of the taxpayer rather than a distinct entity.
Tax Implications
- Sole Proprietorship or Partnership: If you operate as a sole proprietor or a partnership using a DBA, your business income and expenses will be reported on your personal income tax return. You will use Schedule C (Form 1040) to report your business income and deductible expenses. The net income or loss from your business will flow through to your personal tax return.
- Corporation or LLC: If your business is structured as a corporation or an LLC and you choose to use a DBA, the legal entity remains responsible for tax obligations. The DBA is considered a trade name under which the entity conducts business, but it does not change the entity’s tax treatment. The corporation or LLC will file its tax return using its legal name, and the DBA will be listed as one of the trade names used.
It is worth noting that if you operate as a sole proprietor, partnership, or disregarded entity (an LLC with a single owner), and you decide to change your DBA, you must notify the IRS of the name change. This can be done by filing a new Form SS-4, Application for Employer Identification Number (EIN), or by contacting the IRS Business & Specialty Tax Line.
Other Considerations
- Employer Identification Number (EIN): If you operate as a sole proprietorship or partnership and do not have employees, you may not need an EIN. However, if you choose to use a DBA, you will need an EIN in the DBA name to open a bank account, file certain tax forms, and fulfill other business requirements. If you already have an EIN in your legal name, you can use it for your DBA.
- State and Local Requirements: While the IRS views a DBA as an extension of the taxpayer, state and local regulations may vary. It is crucial to research and comply with any additional requirements or registrations imposed by your state or local authorities regarding DBAs.
Conclusion
From the IRS’s perspective, a DBA is not a separate legal entity but rather a name or brand under which an individual or business operates. Whether you are a sole proprietor, partnership, corporation, or LLC, using a DBA does not alter your tax obligations or entity structure. The IRS recognizes the individual or legal entity behind the DBA as the responsible party for tax purposes. Always consult with a qualified tax professional or attorney to ensure compliance with IRS regulations and any state or local requirements when using a DBA for your business.
Video Transcript
How Does the IRS See a DBA?
This is a question by Susan Johnson. It was a comment on one of the YouTube videos, and she provides this additional information. We currently have two DBAs. One for 20 years. One less than a year. We are trying to decide whether to set up one or two LLCs. The businesses are similar design and advertising, but they have different clients and different products.
For example, one is on the web; one is in paper. We are thinking to set up one with an account in a new bank but keep one bank account, the newest venture in the old bank, in case people wrote us checks to that name to be less confusing since we launched that name. We are thinking to then transfer those funds to the old account. Is this a good idea? Does it create any liability hole? How does the IRS see it? Alright, a lot of issues here. How does the IRS see a DBA? The IRS ignores it. They don’t care. It is kind of like if I go by Bob or Robert. Does the IRS care? No. It is just DBAs are different names. The IRS looks right through those DBAs to say what is the legal entity underneath. So the IRS ignores DBAs.
I have a separate video talking about how to use DBAs and the use of them for marketing purposes. So, I am not going to go into that right now, as far as what is better for particular clients or industries, etc. The bottom line is you don’t have to use a DBA for legal purposes. It would only be for a marketing purpose.
Let’s talk about banks, though, because you can use a DBA to set up a bank account. And even though a DBA is just a nickname, sometimes business owners decide they want to have one business account for a DBA. And another bank account for another DBA. You have every right to do that, but legally, those are just bank accounts for the underlying company. DBAs are not separate entities. They are nicknames for the underlying company. So, you can have as many bank accounts as you want, and you can have different DBA names on those bank accounts. But at the end of the day, it is just company money in different bank accounts. Just remember, DBAs are nicknames. The way the IRS and the law looks at a DBA is they look right through it to say, what is the company and what does it own.
Conclusion
If you found this video helpful and you would like more educational videos like this, feel free to subscribe to this channel. If you have other questions, put them in the comments below. I am Aaron Hall, an attorney for business owners and entrepreneurial companies. You can learn more about me at aaronhall.com. And if you would like to sign up for our free resources, go to aaronhall.com/free. It was great to be with you here today.