How to Choose the Right Legal Structure for Multiple Businesses

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June 26, 2023

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Picking the right legal structure for multiple businesses is like the foundation of a house; it supports all your business activities and impacts a plethora of factors like taxes business profits, liability, and your corporate level of control over the company. If you own multiple enterprises, choosing the right legal structure for multiple businesses should be priority one.

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So, how do you decide on the right legal structure for multiple businesses? This guide provides a roadmap to help you navigate through the intricacies. There are three ways you can structure your businesses, with the advantages and drawbacks of each; let’s dive right into it!

Understand your business needs

Different legal structures can cater to different needs, so it’s important to choose wisely based on your business needs. To do this, consider the size of your business—if it’s a small operation, a Sole Proprietorship may be sufficient. For larger businesses, a Corporation or Limited Liability Company (LLC) may be more suitable.

Assess your risk tolerance

In the context of business, there may be more potential litigation. Tell me the answer? Business interacts with the world much more than most individuals, but it is likely that money will be involved. In securing a lawsuit and losing a corporation’s personal assets in an individual company can cause alleged victims. Similar is also possible if your business loan fails and the lender has placed a lien on your assets. The loan provider may try to recover the value of your possession. If there’s a high risk of liability, you might want to opt for an LLC or a Corporation to protect your personal assets.

There are several legal structures available for businesses limited liability companies, and nonprofit corporations, including sole proprietorship, partnership, limited liability company (LLC), S corporation, and C corporation.

Factors to Consider When Making Your Decision: Legal Liability, Taxes, Management, and Ownership

Deciding on the right legal structure for your multiple businesses is no small task. There are a plethora of factors to consider, and each one plays a significant role in the eventual success (or failure) of your enterprise. In this section, we’ll delve into those critical factors: legal liability, taxes, management, and ownership.

Legal Liability

Business ownership comes with inherent risks, and legal liability is one of the most critical. You might want to consider a structure that limits your personal liability, like a corporation or a limited liability company (LLC). These structures separate your personal assets from your businesses, helping protect you from business debts and obligations.

Taxes

The tax implications of your chosen business structure are also crucial. Do you prefer to be taxed at the corporate level, or would you rather your profits be “passed through” to your personal tax returns? Your choice matters. For instance, an LLC or partnership allows for pass-through taxation, while a C Corporation results in double taxation.

Management

How do you plan to manage your businesses? If you’re a lone wolf who likes to have control over all aspects, a sole proprietorship or a single-member LLC might be the perfect fit. However, if you’re more into delegation and shared responsibilities, a partnership or a multi-member LLC may be more suitable.

Ownership

Last but not least, ownership is a key factor in your choice of business structure. Who will own your businesses? Will it be just you, a group of partners, or perhaps a board of directors? Remember, different structures come with different rules regarding ownership, decision-making, and profit sharing.

Take a moment to ponder your options, weigh the pros and cons, and consider seeking legal and financial advice. Remember, the choice of a legal structure is a significant one with long-term implications for your businesses. It is not a decision to be made lightly. Take your time, do your research, and make an informed decision that will best serve your multiple businesses in the long run.

Business structure options

Business structures have traditionally been created in states, therefore details vary between states. These are the three different kinds of business structure models.

Establishing distinct LLCs or Corporations: Imagine setting up unique LLCs or corporations for each of your business endeavors. This approach offers the advantage of risk isolation limited liability partnerships. Essentially, each business becomes a standalone entity, safeguarding itself from the risks associated with the others. Consider running two separate LLCs - a beauty salon and a candle business. If a lawsuit targets your candle venture, your salon remains untouched by any liabilities, and vice versa. This method is ideal if you prefer to keep the finances and tax affairs of your businesses as separate entities. Each LLC or corporation maintains its own set of books and files a separate tax return.

Limited liability companies are relatively simple businesses that require less paperwork. An LLC is likewise adaptable and has the ability to turn to corporate status after the initial investment. It makes LLCs a good place to start a company to grow. On the flip side, owning multiple LLCs or corporations can mean dealing with a mountain of paperwork, fees, reports, and business licenses. It’s a considerable administrative undertaking, requiring separate bookkeeping and individual tax filings for each business entity itself. But, if robust liability protection is high on your priority list, this is the route to take.

Adopting a DBA (Doing Business As): Another structuring option involves creating a primary LLC/corporation with multiple DBAs. A DBA is simply an alias that your business uses instead of its legal name. This approach allows for unique branding for each business type. For example, your salon and candle business can each have their own distinct brand. Setting up a DBA is typically quick and affordable, taking just 1-2 business days and costing around $10-$25 in most states. As all DBAs fall under one LLC/corporation, you only need to pay fees and file reports for one entity. However, while DBAs enjoy liability protection under the main LLC/Corporation, they are not shielded from risks associated with another DBA. If a lawsuit targets your salon, your candle business owner could be held personally liable. Also, a DBA doesn’t grant exclusive naming rights. While your LLC business name is yours alone, another business could potentially open under the same DBA name.

Creating a Holding Company with Subsidiaries: A third option involves setting up a primary LLC/corporation as a holding company with multiple LLC subsidiaries. The main LLC or corporation owns 100% of the subsidiary. This model offers each LLC protection from the liabilities of the others, as well as the holding company. If your holding company’s corporation is financially sound, it could potentially secure funding for its subsidiaries. While this structure requires minimal management for the holding company, it involves significant administrative work and expenses. You’ll need to ensure that your corporation and all LLCs are up-to-date with their tax and state obligations.

Identify your business needs and goals

Before jumping to any of the above legal structures, take a step back. Reflect on what you need and want from each of your businesses. Are there unique risks associated with one of your businesses that need to be isolated? Do you envision one of your businesses expanding or having shareholders in the future? These considerations will help guide your decision-making process when selecting the most appropriate structure for your businesses.

Consult with legal and financial advisors

Sorting through legal jargon and financial implications isn’t a walk in the park. It’s essential to consult with legal and financial advisors who can provide expert advice tailored to your specific situation. These professionals can help you to understand the tax implications, liability risks, and administrative requirements associated with each legal structure. They can also guide you in avoiding potential pitfalls and ensuring your businesses are compliant with all state and federal regulations.

Consider the long-term implications

When choosing a legal business structure, for your multiple businesses, don’t just think about the here and now. Consider the long-term implications of your decision. Will your chosen business structure still allow for growth and flexibility? Can it protect your personal assets if one of your businesses faces a lawsuit or bankruptcy? By considering the future, you can choose the right business structure that will provide a solid foundation for your businesses in the years to come.

Work with a professional to ensure compliance and protection

Deciding on a legal structure for multiple businesses can be like navigating a maze. However, like any challenging journey, a trusty guide can make all the difference. In this case, that guide could be a professional such as a lawyer or a certified public accountant (CPA).

So, why engage a professional?

  1. Compliance: They ensure that you meet all local, state, and federal laws and regulations when setting up your businesses.
  2. Protection: They can help you limit personal liability and protect your assets by choosing the right legal structure.
  3. Efficiency: They can save you time and effort in handling paperwork and other legal formalities.

Having an expert by your side means you have someone who understands the complexities and can help you make informed decisions. But remember, not every professional is the right fit for your business’s needs.

Finding the Right Professional

Looking for the right professional is a bit like dating - you need to find a match that complements and understands your unique needs. Here are some tips:

  • Look for professionals who specialize in business law and have experience in handling multiple businesses.
  • Make sure they understand your business goals, industry, and risk tolerance.
  • Check their reputation, client testimonials, and if possible, seek recommendations from other business owners.

In conclusion, while setting up the legal structure for multiple small businesses yourself can be challenging, working with a professional can ensure compliance and offer liability protection too. It’s an investment that could save you a great deal of time, effort, income tax, and potential legal headaches down the line.

Making the best choice for your multiple businesses

Choosing the right legal structure for your multiple businesses isn’t a choice to be made lightly. It’s like selecting the perfect pair of shoes for a marathon; you need to consider comfort, durability, and the terrain ahead. But fear not, you’ve got this!

Remember, no one size fits all. What worked for Joe’s Tech Emporium might not be the right fit for your blossoming bakery chain. Your business goals, the industry you operate in, and your personal risk tolerance should all be taken into account.

Don’t be afraid to seek professional advice. A lawyer or accountant can provide valuable insight into the legal and financial implications of each structure. They can help you weigh the pros and cons and make an informed decision.

Keep in mind, too, that your decision isn’t set in stone. As your businesses grow and evolve, the structure can adapt. If a sole proprietorship isn’t cutting it anymore, you might find a partnership or LLC more beneficial.

Choosing the right legal structure is a marathon, not a sprint. Take your time, do your research, and make the decision that’s best for your businesses. The finish line might seem far away, but every step takes you closer.

So, lace up those metaphorical sneakers and start your journey towards choosing the perfect legal structure for your multiple businesses. You’ve got this!

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.
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