What's the Best Way to Legally Structure Multiple Businesses?
There are advantages and disadvantages to structuring multiple business, and lots of ways to do it wrong.
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Most entrepreneurs I know are driven, curious and never content with the status quo. These traits are probably why so many of them dabble in multiple ventures. A restaurateur may open a wine shop; a personal trainer may launch a line of fitness apparel. There’s always a new opportunity out there somewhere, and diversifying your income can be a sound strategy.
If you are running multiple businesses or thinking about starting a second one, you may be wondering what is the best approach for legally structuring each business: should you have separate corporations/LLCs for each one or a big umbrella company to hold them all? Are there any limits to the number of companies one person can form?
Generally speaking, there are three different ways to structure multiple businesses. There are advantages and disadvantages for each approach — and the best structure will depend on your personal situation. Here’s some general advice to consider, and you can always discuss your specific needs and details with a CPA or attorney.
1. Create individual corporations/LLCs.
First, there’s no limit to how many corporations or LLCs one person can form. Many entrepreneurs opt to file a new LLC or corporation for each of their startup ventures. For example, you can form an LLC for your landscaping business and another LLC for the golf course you purchased.
Related: Why You Should Never Start Just One Business
The main advantage of this approach is that it isolates the risk to each individual business. Should a client sue your landscaping business, your golf course business will be protected. Likewise, if your golf course has a few down years, your landscaping business won’t have to share in any of the liability.
The main downside with this approach is that it involves additional maintenance fees and paperwork. For example, you’ll need to pay to incorporate/form an LLC for each business, as well as any annual maintenance fees/forms to the state. You’ll also need to get separate business licenses and EINs for each business, and file tax forms for each corporation. For some entrepreneurs, all this separate paperwork can be a pain. But for others, the added fees are well worth it in order to protect each individual business from the others.
In particular, real estate investors often form an LLC for each property in order to shield each investment. If “Property A” is sued, you won’t be risking any of the assets belonging to “Property B” or “Property C.”
2. Put DBAs under one corporation/LLC.
Another common option is to file one LLC or corporation, and then set up multiple DBAs (Doing Business As) for each of the other ventures. Keeping with the previous example, you may have an LLC for “Ken’s Landscaping Services.” Then, if you start a golfing business, the LLC can file a DBA for “Ken’s Golf Course.” From a marketing perspective, you can run each business as if they are separate companies — use each individual business name, accept checks written to each business name, etc.
Related: 4 Tips for Managing Multiple Locations of Your Business
With this approach, each business venture can use the right branding and company name, while you simplify some of the annual maintenance. You just need to pay your annual LLC/corporation maintenance fees for the LLC/corporation (and not each individual DBA). If you need and/or use an EIN, you’ll just need one EIN. And when it’s time to file your taxes, you can take the income earned from each DBA and report them in a single tax filing under the main LLC or corporation.
Each business venture (DBA) enjoys the legal protection of the main LLC/Corporation. For example, if something should happen to one of your DBAs, your personal assets will be shielded (assuming you filed the DBA under your LLC/Corporation). But each DBA isn’t protected from the other DBAs. So if one DBA is sued, all the other DBAs under the main LLC/corporation are liable.
3. Create a business under the holding company.
In the third approach, you can create individual corporations/LLCs for each of your businesses and put them under one main holding corporation/LLC.
This scenario is common in a few situations. One, for companies that are looking to be acquired or potentially spin off one of their businesses. Two, for established companies that are looking to start a new business (and the established company will fund the new venture). As expected, this scenario can have complex tax and legal implications — and it’s best to consult with a tax adviser or attorney on the best way to structure a holding company and subsidiaries.
Related: We want to start several businesses
The bottom line is there’s no (legal) limit to how many business ventures you can start and run. Just make sure that you properly account for your liability risks when structuring these ventures.