How to structure multiple businesses
If you have clients who own more than one business, how they structure those companies can affect them from the legal and tax perspectives.
As an accounting professional, you will likely be the person they'll talk with to understand the tax implications. It also will be helpful for them to speak with an attorney for guidance on the legal ramifications.
To help your clients understand some of the considerations to think about when structuring multiple businesses, let's look at three possible ways many entrepreneurs approach the situation:
1. Have a single corporation or LLC and create individual DBAs (“Doing Business As,” also known as a “fictitious name” or “assumed name") for each business line that the company operates.
2. Form separate corporations or LLCs for each business.
3. Create a holding company and form separate corporations or LLCs beneath it for each business.
Each approach has pros and cons, so clients will want to weigh each option carefully before deciding on the route to travel.
Three ways to legally structure multiple businesses:
1. Single business entity with multiple DBAs
With this approach, business owners form one LLC or corporation and then file DBAs for each line of business that will operate under that entity.
For example, let’s imagine a business owner has formed an LLC for her retail store called “Fashion Accessories by Liz, LLC,” and then wants to set up an online clothing boutique. The LLC could file a DBA for something like, “Dress Like You Mean It Boutique.” This would enable Liz to market and manage each business line separately (each accepting payments and writing checks in its independent name, etc.).
Because there is just one registered business entity to maintain, this way of managing multiple business lines would keep setup and ongoing compliance formalities minimal. For instance, Liz would only need to apply for one Employer Identification Number, and her LLC's profit and loss (including that of her DBA) would get reported through her personal tax returns. Other compliance requirements might also exist, depending on the type of business and where it's located. However, this scenario is generally less complicated compared to other ways of setting up multiple businesses.
With DBAs under a single LLC or corporation, they get personal liability protection through their registered business entity. It’s important to realize, though, that multiple DBAs under a corporation or LLC are not insulated from each other's legal or financial debts. All are considered to be the same legal and tax entity, and all are liable.
2. Form separate LLCs or corporations for each business unit
Another option your clients might want to consider is forming individual LLCs or corporations for each business they wish to operate. In this case, each business is its own standalone entity.
This approach can be attractive to those who want to isolate each business's legal and financial risks to its own liabilities rather than assume the risk of all of the entrepreneur's business operations.
Using my earlier example, if someone were to sue Fashion Accessories by Liz, LLC, then Dress Like You Mean It Boutique, LLC would not be liable for the other company’s legal or financial debt. Same goes if Dress Like You Mean It Boutique, LLC were sued; Fashion Accessories by Liz, LLC would be shielded if the other business ran into legal or financial hardship.
Real estate investors will often choose this approach, forming an LLC for each property that they own, to protect each individual investment from the potential liabilities of the others.
A potential disadvantage of starting and maintaining separate LLCs or corporations is that each entity must formally register with the state, obtain an EIN, designate a registered agent, etc. Also, each entity must submit its own ongoing annual compliance forms and fees. And, as you know well, there will be more tax forms to deal with because each company must file its profits and losses separately.
3. Create a holding company with separate LLCs or corporations beneath it
This approach involves one holding company (LLC or corporation) that forms other LLCs or corporations beneath it.
Structuring multiple businesses by forming a holding company with subsidiaries may be attractive to entrepreneurs in the following situations:
- The business owners want to start a new business and have their existing company fund it.
- The business owners wish to spin off one of their companies.
- The business owners want to have one of their business lines acquired by another company.
This way of operating multiple businesses helps centralize control over the companies, protect individual business lines from the liabilities of the others and provide flexibility for growth. However, it may lead to more complicated legal and tax ramifications.
Each to their own — the importance of considering each client’s unique situation
With entrepreneurs' circumstances varying widely, clients need qualified accounting and legal guidance when exploring how to set up multiple businesses. As your clients’ trusted advisor, you have the knowledge and insight to direct them on the matters you specialize in and point them in the direction of the right resources to address other issues and concerns. They have a lot riding on their decision — so they should cover all of the bases before making decisions that can potentially affect their long-term success.