US Tax: : Setting up multiple businesses: what’s the best structure?

Entrepreneurs will often reach a point in their business venture where they want to do a spin off of their present business, or even a completely different venture.

One of the first questions that will be asked in this pursuit is ‘What is the best legal business structure for multiple businesses?’

Legal Business structure for multiple businesses

There are a number of strategies you can use for structuring your business ventures, such as:

·      Individual corporations/LLC

·      DBA under one Corporation/LLC

·      Holding Company

Forming multiple corporation/LLC for multiple businesses

There are no limits to how many corporations or LLCs one person can form.

A common option for entrepreneurs looking to create a new business is forming a new LLC and corporation for each one of their start-up ventures.

 

Advantages to operating multiple corporations/LLC

·      Isolates risk to individual business. This means that if a client attempts to sue your business, the risk of damage is limited to the relevant company only.

·      Financial risk. If your new company fails to take off and is negatively affected by finances. The potential is limited to the mentioned business only and not any of your other corporations.

 

Disadvantages to operating multiple corporations/LLC

·      Additional maintenance fees and paperwork. For instance you will need to incorporate/form an LLC for each business, as well as annual maintenance fees.

There are a number on instance where electing to have your business separated into separate corporations/LLC’s can be beneficial. For instance:

·      High-risk equipment and vehicles: If your business involves high-risk equipment or vehicles, there is likely to be a higher risk of claims against your company. By separating the business into a separate entity it will help protect personal and other corporate assets.

·      Multi-state Activities: Depending on the type of work and the states involved, creating a separate entity for different jurisdictions can be worthwhile when operating in states with high tax rates. However, a number of states require unitary tax filing, which would eliminate the benefits of this separation.

·      Appreciating Assets: Assets should be segregated to provide liability protection and to ensure capital gain at time of disposition.

·      Preparing for future sale: By maintaining separate entities for direct lines of work it can simplify selling a specific division of your business. Trying to bifurcate an on going business is difficult and time consuming.

·      Joint venture- when joining with an outside party on a new project the risks increase. It is important to separate the activity to minimize the risk and monitor performance.

Forming DBAs under one corporations/LLC

A common option for entrepreneurs wishing to form a new business is setting up one LLC or corporation, and then set up DBAs (Doing business as) for each one of the ventures. From a marketing perspective you run each business as if they are separate companies.

Advantages to operating as a DBA under one corporation/LLC

·      Each business venture has the right to use different branding and company name.

·      Simplify annual maintenance. You only need to pay your annual LLC/corporation maintenance fees for the LLC/corporation, (not for each DBA). If you need and/or use an EIN, you’ll only be required to have one across the whole LLC/corporation.

·      When it comes to filing your taxes, you can take income earned from each DBA and report them in a single tax return under the main LLC or corporation.

 

Disadvantages to operating as a DBA under one corporation/LLC

·      If one DBA is sued all of the DBA’s under the corporation/LLC are liable.

Forming a holding company

Another option an entrepreneur can take when considering how to set up multiple businesses is forming a holding company. Forming a holding company is where you create individual corporation/LLCs for each of your businesses and then put them under one main holding corporation/LLC.

Advantages to operating as an LLC/Corporation under a holding company

·      Potential to commingle income and losses for multiple C corporations without commingling liability.

·      Opportunity to maximize deductions (E.G. IRC ¢199 domestic production activities deduction)

·      Centralized overhead for all entities

·      Reduces staffing

It should be taken with deep consideration as to whether operating multiple entities is for the right move for your company. Cash flow among multiple entities can be cumbersome. Companies often unintentional create additional taxes due to organisation structuring and often overlook sales tax and gross-receipts-based taxes with affiliated company transactions. Not forgetting that the impact of VIE (Variable Interest Entity) requirements can impact your financials.