Risks of Doing Business as a DBA

If you read my last column, then you will remember that I discussed the awful consequences if you allow your corporation or limited liability company to become “suspended” by the Secretary of State. These are serious self-inflicted wounds that can be easily avoided by following some simple rules, as I laid out in the column.

Now, some of you may be thinking, “OK, well, thank God I don’t do business as a corporation or limited liability company.” But that is short-sighted.

Regardless of whether your business is a sole proprietorship, a partnership, or a corporation or limited liability company, if you are doing business under another name, you have rules to follow as well.

Let’s say George Jones owns a hamburger stand as a sole proprietorship and calls it “George’s Famous Burgers.” Or, Peter, Paul and Mary, a partnership, operates a shop called “Puff’s Smokes.” Or, Dr. Mary White, an orthopedic surgeon, has a professional corporation called Dr. Mary White and does business as “White’s Spine Clinic.”

All those business names can be termed either “fictitious business names” or “doing business as” (“DBA” for short). Many businesses do this, operate under a DBA.

And some follow the law, which is Business and Professions Code section 17918. This code section provides, “No person transacting business under a fictitious business name … may maintain any action upon or on account of any contract made, or transaction had, in the fictitious business name in any court of this state until the fictitious business name statement has been executed, filed and published as required by this chapter.”

In other words, if you run a business (whether as a sole proprietorship, a partnership, a corporation, or a limited liability company) under a DBA and don’t register that fictitious business name with the county, then you can’t file a lawsuit to enforce a contract or to collect on a debt owed you. This unpleasant reality recently hit a well-known car dealership smack in the face.

In the case of Villareal v. LAD-T, Villareal sued his former employer, LAD-T LLC, dba Toyota of Downtown Los Angeles, for wrongful termination, alleging that LAD-T had fired him because he filed a Worker’s Compensation claim. During the litigation, LAD-T asked the court to send the case to arbitration, saying that Villareal had agreed to submit any employment claims to binding arbitration.

Unfortunately for LAD-T, the court denied the motion. You see, while LAD-T had followed the rule and registered the fictitious business name of Toyota of Downtown Los Angeles, it also had a DBA of DT Los Angeles Toyota, a DBA that LAD-T had not registered. And, the problem for LAD-T was that its arbitration agreement with Villareal was under the unregistered DBA of DT Los Angeles Toyota.

Villareal pointed this out to the court, which used this as the basis for denying the arbitration motion.

LAD-T appealed the ruling. The Court of Appeal upheld the denial of the arbitration motion. The court reasoned that section 17918 is quite clear in the sanctions imposed if a business does not register its DBA. As the Court of Appeal said, “The object of section 17918 is simply to ensure that those who do business with persons operating under a fictitious name will know the true identities of the individuals with whom they are dealing or to whom they are giving credit or becoming bound.”

So, a word to the wise. If you operate a business under a DBA, file the fictitious business name statement with the county and pay to renew it every five years. For all of the benefits you get, it’s a cheap price to pay. And avoid another self-inflicted wound. Thus, if you are delinquent on sending in the Statement of Information for your entity, it might get suspended, which means that it can’t sue anyone or even defend itself and any contracts that the entity signed while it was suspended can be voided or set aside.

These are not the only corporate formalities, but they are often the ones that I see entities fail to follow, resulting in the corporation or the LLC being suspended. And, frankly, if I’m representing a client in a lawsuit and I find out the LLC on the other side is suspended, I use that as a valuable weapon. I have gotten lawsuits dismissed or claims for hundreds of thousands of dollars reduced to $10,000 or less. Self-inflicted wounds are the worst because they are so easy to avoid. ©

Carl Kanowsky of Kanowsky & Associates is an attorney in the Santa Clarita Valley. He may be reached by email at cjk@kanowskylaw.com. Nothing contained herein shall be or is intended to be construed as providing legal advice.

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