Do's and Don't's for DBAs

by Mary Beth Guard, Esq.

Why is it that accounts for corporations, partnerships, limited liability companies, guardianships, estates and the like are so easy to open and document, yet even the most seasoned new accounts professional can feel uneasy when faced with a new DBA customer?

For the uninitiated, DBA is the acronym for "Doing Business As." It refers to a situation where a different name is being used to conduct business. If Fran Jones starts a little side business selling hot dogs, she might call it "Fran's Feisty Frankfurters." If she chooses to operate the business as a sole proprietorship, rather than as a partnership, corporation, or other legal entity, then the correct styling for her business account would be "Fran Jones, DBA Fran's Feisty Frankfurters." It correctly reflects that the business consists of a single individual doing business under another name.

That is not the only context under which DBAs arise, however. A corporation or partnership may have many different business interests within it which are not separate legal entities and it may wish to do business under one or more of those names. In most states, in order to do so, the corporation or partnership would need to obtain a trade name certificate or fictitious name certificate through the appropriate government authority. This provides an important tracking mechanism.

Otherwise, these "phantom" entities can pose a real challenge for banks. How do you know they're who they say they are? What precautions can/should you take? What are the dangers?

Start first by learning what your state's laws require. For example, some states require sole proprietorships to be registered. Others, unfortunately, do not. Fictitious name certificates or trade name certificates are mandated in some jurisdictions for any legal entity that wants to do business under a name other than its legal name. In some jurisdictions, general partnerships have filing requirements. Find out what precautions are built in to the statutes where you are located and observe those precautions. For example, if Brussel Sprouts, Inc. wants to do business as "Heinous Vegetables" and your state requires a corporation to do a trade name filing in order to operate under another name, make sure the trade name filing was done and you get a copy of it.

The riskiest area is sole proprietorships. Countless instances of fraud have occurred where someone with access to checks made payable to a company has stolen the checks and deposited them into an account opened for a bogus DBA with the same name.

Here's an example: Jordan works in the mail room of the Missouri Mindblowers Association (MMA). Many members send in checks for dues, seminars and products, making them payable to "MMA" to save time. Jordan steals all the ones payable in that fashion. She then goes to a bank across town to set up a new account. She explains that she has a new business, a sole proprietorship, called "Momma's Merry Angels" that she wants to establish an account for. The account is opened and she commences to deposit checks made payable to MMA that she stole from Missouri Mindblowers. It takes a while for the scheme to be discovered, but when it is, Missouri Mindblowers wants the bank to give the money back, alleging the bank was negligent in allowing the account to be opened and the deposits to be made.

How do you avoid such fraud? In addition to making sure you avail yourself of any statutory protections, apply a heaping dose of common sense. If the bank had pulled a credit report on Jordan (as the sole proprietor) they would probably have learned she was employed by Missouri Mindblowers Association.

Noting the acronym of her employer matched the acronym of her supposed business should have raised a red flag. The fact that she was opening an account in a different part of town from where she lived should have also raised questions. Could she easily answer the bank's friendly questions about the nature of her business? Did she have a business card? Does the business have a phone listing? An Internet domain name? A Yellow Pages ad? Could she show you samples of her products? These things may not be sufficient to lead you to decline to open the account, but they may make it prudent for you to closely scrutinize the transactions on it. Are the checks deposited consistent with her statements about the purpose and type of business and the clientele and dollar volume it should be attracting?

Consider having the sole proprietor execute an Affidavit of Sole Proprietorship. In such a document, the sole proprietor swears under oath that they are the owner of a genuine business operating under whatever the name is, that the name is not being used to defraud or mislead, that the sole proprietor has no knowledge of, or connection with, any other business operating under a similar name or acronym. Will the affidavit absolutely prevent the fraud? No. But it will show the bank attempted to avoid it. Do you have a better way? Share it with us!

BANKERS' HOTLINE advisor Mary Beth Guard is Chairman & CEO of the Glia Group, banking consultants from Oklahoma City. Her past life includes 13 years as a banking attorney; 5 years as General Counsel for the Oklahoma State Banking Department; 8 years as General Counsel and COO for the Oklahoma Bankers Association and from 1997 to last February with Thomson Financial, where she created the "bankinfo.com" web site. Copyright © 2000 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 10, No. 8, 8/00