Why Bother With Having More Than One Company?
06.11.19 Benefits of owning more than one company/entity.
For the most part, many businesses are run out of one company, one entity, and that is acceptable. Even though that method is an acceptable way to organize your business, it is also essential for you to consider the other side, which is owning more than one entity to limit your liability. Why would you want to own more than one company, though?
To illustrate this, consider a business owner who also owns the real estate property where the business is operating. The property of the business should be structured in a different entity than the business operations (neither should be owned directly by the business owner but rather specifically through a separate entity). The business operations might be structured as an "S" Corporation, while an LLC owns the business property and rents the property to the “S” corporation. By structuring your businesses this way, you are limiting the liability of a creditor reaching the business property if any significant issues arise out of the operations.
You can also include this type of structuring when there are different business divisions – for example, a retail operation and a wholesale operation; or two locations for the same kind of business. Another option is to structure the business operations in separate entities that are owned by a holding company. The holding company is the parent, and the operations are subsidiaries, this way, the holding company has no operations. Why is this good? Well, for one if the parent holding company doesn’t have operations, it can have one of those awful problems, and its creditors can’t easily access the subsidiaries to pay off that debt. If the holding company does have operations than those subsidiaries are like any other asset, and creditors can proceed to acquire those subsidiaries to pay off the company’s debt.
Another benefit of having separate entities is like having an extra insurance policy. Insurance doesn’t necessarily cover every risk, and there are dollar limits on the coverage, but with multiple entities, you have different insurance policies further helping to limit liability.
Setting up the second company:
You can’t just set up the second company with the Secretary of State and be alright. You must treat them as entirely different companies, and if you don’t, then the creditor doesn’t have to either. To understand this, you really must manage the companies like they are separate entities. Each entity should have a different bank account (and don’t just lightly pay bills for one company out of the other company’s bank account), a different letterhead, separate billing invoices, different business cards, and individual websites. Ideally, each entity should have different telephone numbers, separate locations, and different employees. Not everything is always feasible, but every effort should be made to make these separate and distinct companies. If you can’t have two telephone numbers, at least answer the phone in a manner that indicates that there are two different companies available. If you can’t have the separate personnel, then be sure that each company pays its share for the use of that personnel.
So that means you have lots of tax returns to file too – right? Not necessarily – often they can be treated as just one company for tax purposes even though they are treated as separate companies for liability purposes.
If you would like more information or have any questions, please reach out to MB Law at firstname.lastname@example.org.
* This information is for general purposes only and is not intended to constitute any specific legal advice of any type.