When it’s time to think about branching out, many business owners face the dilemma of how exactly to handle this expansion. Do you just keep it all under one company regardless of the distinct nature of your new business activities? Or do you create completely separate LLCs?
As there are multiple ways to run different types of business, the choice largely comes down to the potential industries of your expansion, as well as the primary field your company occupies. As it stands, your main options include:
- Registering DBAs for doing different business activities;
- Running multiple LLCs under one holding company;
- Creating independent companies for each business type;
- Starting a Series LLC (if this option is available in your state).
These methods have their strengths and weaknesses, plus their effectiveness relies on the type of business you run and your financial capabilities. Let’s examine these options in more detail.
Organization of Several Enterprises Under One LLC: Should It Be Done?
Using a holding company to operate several enterprises is a popular choice among entrepreneurs who have strong financial backing, i.e. they are able to comfortably invest into multiple entities and maintain them without damaging the net profit.
Managing multiple businesses through a holding company—in this case, an LLC—can be highly beneficial but also detrimental in other ways.
Holding Company Pros:
- Better limited liability protections for subsidiaries;
- Profits and expenses of each LLC are clearly separate from others;
- No account intermingling on the subsidiary level.
Holding Company Cons:
- Complex administrative procedures;
- Lack of any real application of the parent company aside from subsidiary ownership;
- Potentially confusing taxation process;
- Subsidiary assets are at risk if the umbrella company faces a lawsuit.
For this reason, the choice to launch separate different LLCs is more common, especially if you want to avoid the liability dangers of DBAs. This method is inarguably more costly than working with DBAs, but the maintenance costs more than justify the full asset protection.
How to Structure Multiple Businesses Under One Roof
As mentioned before, there are several ways you could run different forms of businesses, whether it’s within a single entity or alongside each other.
Using a DBA
Registering one or several fictitious names is a good way for independent entrepreneurs and single-member LLC owners to manage their increasingly diversified operations. If you started a business focused on providing only one type of service but are now handling other services and product lines, this is a good way to separate them from the main venture, both for your paperwork and to avoid confusing your customers.
Providing your services using a DBA helps promote your businesses to specific market segments. Instead of using the name of your LLC for your other businesses, you can utilize more appropriate fictitious names to reach your target customers.
The downside of DBAs is their lack of personal liability protection. DBAs are not separate entities. What they do is grant you the right to use a specific business name. However, this right is not exclusive.
Forming Separate LLCs
By launching a completely independent LLC for each type of business, you will be able to not only keep their accounts safely in order but also ensure that no litigation brought against one LLC can be applied to your other businesses. This method is much easier to manage in terms of the internal regulation of each entity, which can’t be said for working with a holding company.
When you create separate entities for each of your product lines or services, you draw a clear distinction between every given LLC and other entities in your ownership. This helps primarily with marketing, though most of the time, owners choose this path for the purposes of avoiding liability risks. To avoid any confusion, it’s recommended to create a process hierarchy to reflect the factual standing of each entity.
One major drawback of this method is the maintenance fees. Each LLC will have to be kept compliant through annual reporting (which may cost hundreds in some states), license renewals, and other service fees.
Starting an LLC Holding Company
When you establish an LLC as your holding company, be aware that it can only exist in an administrative capacity, as it were. Its job as a parent entity is to own other LLCs and their assets, whereas all operational abilities like hiring employees and conducting business transactions are delegated to the subsidiaries or, as they are often called, operating companies.
Unlike separate LLCs, operating LLCs owned by a single holding company don’t have unrestricted access to their assets. The parent company owns vital assets of the operating LLCs and manages percentage interests. If a subsidiary wishes to get access to a specific asset amount, it must take a security interest or mortgage from the parent LLC.
This model is extremely popular in the field of real estate investment and development, allowing the owner of the holding company to create a sibling LLC for each property to manage it separately. By belonging to the same parent LLC, these sibling companies could be structured and financed almost identically, but thanks to the nature of the LLC business model, the actual properties are fully shielded from each other’s liability.
Forming a Series LLC
Only a handful of states support this business structure, with Delaware being the first to approve it. At present, this structure is legal in 19 states, D.C. and Puerto Rico. Due to its relatively new status, this business model may be somewhat difficult to manage.
Although they seem similar in concept, Series LLC and holding companies are not identical. Where a holding company acts only as a non-operational entity for holding assets, the master LLC in a series can generate its own profits through actual business activity.
In a series, each dependent company has the option to hold its own assets or leave them in the power of the master company. This model is easier to manage than a holding structure, especially one of corporate designation.
On the downside, the legal support for the series model is less established. Many states lack concrete developments for resolving disputes, and the laws in each jurisdiction can differ starkly in their nuance. You may also encounter difficulties in obtaining loans as some banks tend to stir away from funding Series LLC.
How Does This Affect My Taxes?
Each business structure comes with specific tax requirements, and that’s not counting additional taxation based on your industry and location.
- Separate LLCs are taxed individually in accordance with their structure:
- Single-member LLCs are treated as sole proprietorships, so the owner reports all profits and expenses on their individual return by filing Form 1040 on Schedule C;
- Multi-member LLCs are classified as partnerships for tax purposes, so in addition to the owners reporting all profits on their personal returns through Form 1040 on Schedule E, the company itself reports to the IRS by submitting Form 1065 on Schedule K-1.
- DBAs are not independent entities, so if they are part of an LLC, they don’t hold any tax benefits. The IRS considers DBAs as one business—the LLC that owns them—regardless of their number. All revenue owned under fictitious names are filed on the LLC’s regular returns, either Form 1040, Schedule C for sole owners, or Schedule E for multiple owners;
- A holding company might allow for a consolidated tax filing for all subsidiaries, depending on how it operates. If a structure qualifies for such a return, the overall income tax payable could be reduced. In some cases, subsidiary dividends can be exempt from tax, allowing subordinate LLCs to withhold the taxation of their profits until they withdraw the funds from the parent company;
Series LLC reports as partnerships by filing Form 1065 on Schedule K-1. According to the IRS regulations, each sibling company in a Series LLC is classified as an independent entity in relation to the federal income tax.