Entrepreneurs running several companies under one LLC may benefit from creating multiple corporations.
4 min read
Opinions expressed by Entrepreneur contributors are their own.
What kinds of traits do entrepreneurs share? They’re driven to succeed. They’re not afraid to try, experiment and fail. They love to iterate and expand. All of these traits lead to the oh-so-common case where one entrepreneur has multiple businesses, all operating under one limited liability company (LLC). But, is this the best practice?
Having one LLC under which other businesses operate, either as a Doing Business As (DBA) or a holding company, can be perfectly fine. On the other hand, you can certainly create a new LLC for every business you want to make.
Making multiple LLCs, in fact, is perfectly legal; there is no limit to the number of LLCs one person can register. On the other hand, it’s more paperwork than you might otherwise need to do. Taxes become individual taxes for each LLC, rather than one larger aggregate whole. Managing business licenses, EINs and fees can add up in both time and money.
What, then, are the benefits to making multiple LLCs? Do those benefits outweigh the drawbacks?
1. Multiple LLCs limit liability.
An LLC is already a limited liability company, but making a different LLC for each new business further segments and limits any potential liability between companies. If you have three businesses, and one of them tanks, the other two are not on the hook for anything that goes wrong. You can shutter that one without risk to the others.
You can see limited liability in action most often among real estate investors. Many real estate managers will form a new LLC for each individual property they own. If one property ends up subject to legal action, the others will remain separate and distinct, not at risk from the lawsuit.
2. Multiple LLCs are easier to split.
Entrepreneurs don’t just create and build businesses; they sell them when it’s profitable to do so. When you have several different businesses under one LLC, it becomes a complex task to segregate and bundle up the paperwork, the assets and the contracts associated with one of those businesses when you want to sell it.
Meanwhile, if you have multiple businesses, each as its own LLC, all that extra paperwork actually becomes a benefit. It’s a lot easier to wrap up all of the loose ends and sell the whole package, without worrying about transferring ownership or otherwise pulling it out of the web of relationships that is a multi-business LLC.
In fact, it’s often so much work to extricate the assets and relationships of one sub-company from a single LLC that it becomes impossible to sell. Many investors looking to buy won’t even glance at a tangled mess; they want the neat and tidy package. That’s not to say it’s impossible to sell, but the bar becomes that much higher.
3. Multiple LLCs are distinct entities.
This scenario is the most relevant when it comes to taxes. Corporate taxes are a complicated mess of loopholes and exploits. So, keeping multiple businesses in individual LLCs can open up opportunities for lower tax brackets, where their combined income might bump up their owner a bracket. There are also often incentives for new businesses, which can be captured by a newly registered LLC but not by a new business opening up under an existing LLC.
Related: Legal Tips for Setting Up a ‘DBA’
In any multi-business situation, you’ll want to consult with business lawyers and accountants to make the appropriate decision for your situation. For instance, a real estate-management company might do best to divide up into multiple LLCs. But more closely related businesses — picture cross-state landscaping services combined with landscaping for residential use versus commercial use versus groundskeeping services — might be best kept as DBAs. The key is to analyze the benefits in your specific situation.