Do you have a bunch of business ventures going at the same time? Today, it’s common for entrepreneurs to make their incomes through a variety of businesses and projects.
You might know how to handle this from a marketing perspective – for example, you’ve got completely different business names and websites for your restaurant and mobile app business. But how do you handle multiple businesses from a legal perspective? Should you form one corporation that covers everything or should you form separate LLCs or corporations for each one?
In general, there are three approaches for legally structuring multiple businesses. Each approach has its own set of advantages and disadvantages to consider. Here’s what you should know:
Approach One: Form a corporation or LLC for each business
With the first approach, you will create a separate entity (either an LLC or corporation) for each business venture. For example, you might create an LLC for your HR consulting business and another LLC for your business as a science fiction author.
This approach might seem simple and straightforward, and particularly appropriate for those types of businesses that are not connected at all (i.e. a restaurant and mobile app company). However, this approach also means there’s a lot of paperwork to fill out.
With two different business entities, you’ll have to file separate forms (Annual Reports, meeting minutes, etc.) for each business. And for corporations, you’ll also need to file separate tax forms for each corporation. Consequently, this approach is discouraged for people who don’t want a lot of administrative requirements. In addition, keep in mind that a tax advisor may advise you to combine your business ventures, so the losses of one business can offset the profits of another.
If you’re a real estate investor or involved in other risky businesses, forming separate corporations or LLCs is probably the best strategy as it shields each business’ assets from the liability of another. For example, you can form an LLC for each investment property in your portfolio. This means that if a renter sues you for something that occurred with Property A, only those assets belonging to LLC A are involved. Any assets related to your other properties/LLCs are shielded, as are your personal assets.
Approach Two: Form one Corporation/LLC, then file DBAs under the main Corp/LLC
With the second approach, you will form one main company as an LLC or Corporation. Then, that LLC or Corp will file fictitious business names (or DBAs) for all of your ventures. For example, you can create a holding company (i.e. Four Sisters, Inc.) and then file DBAs for each business venture name. The advantage of filing multiple DBAs under the same LLC or Corp is that all of the business ventures will be taxed together as one (of course, situations vary and you should always consult with a tax advisor for individual advice on what’s best for you). In addition, you’ll just have one set of annual reports, meeting minutes, and other compliance paperwork to file.
The downside to filing multiple DBAs under the same entity is that if something happens to one business venture, it can impact all your other businesses. So, if you’re running a Bed & Breakfast and a guest gets hurt and sues you, all the assets for each business venture (like an online business) can be jeopardized.
Approach Three: Create one Corporation/LLC with other corporations or LLCs under the main holding company
In the third approach, you will create a holding company that owns individual corporations/LLCs. So, instead of filing DBAs as described in the second approach, the main LLC/Corp will form corporations or LLCs for each of your businesses. This strategy is often preferred by companies that are looking to be acquired, as well as established companies that are looking to start a new business (and the established or holding company will fund the new business).
As expected, the tax and legal implications can become complex for this approach, so consult with a tax advisor and/or attorney for the best way to structure your holding company and its subsidiaries.
Editor’s Note: This was originally written by Nellie Akalp for All Business Experts.