September 15, 2020
Running multiple small businesses creates several potentially lucrative revenue streams, but structuring them can be a headache. As an owner, you can consolidate all your entities under one company, and for many entrepreneurs, this is the best course of action.
Companies looking to operate under one umbrella are not limited to a one-size-fits-all solution. There are three basic structures that they can fall under. Each has legal and tax implications, along with pros and cons.
We’ve outlined the main options for you here, so you can determine which option suits your entity. Read on to learn more.
Use a Single Holding Company
Your first option is to set up separate corporations or Limited Liability Companies (LLCs) for each enterprise all under a single holding company. A helpful way to think of this is as separate buildings on one property.
Holding companies don’t provide goods or services themselves but own shares and assets of other companies. Your holding company will have stock in all of your small businesses, linking them together to form a corporate group.
The single holding company option is a good idea if:
- You want to start a new venture with your existing entities providing the capital
- You plan on selling some of your companies at a later date
- You know that you’ll want to form spin-offs of your existing enterprises at some point
These options are all possible because each of your corporations or LLCs is distinct from the other. However, be mindful that this creates more tax and legal complexities than other multiple business structures.
Create Fictitious Names
If a single holding company with multiple ventures is like detached buildings on one piece of land, fictitious names are akin to various rooms within one house. In this case, you need to establish one corporation or LLC and then create different names for each of your ventures.
For example, if you own a hair salon and start to manufacture hair care products or move into other beauty treatments, you can file a separate form for each of these ventures. You’ll need to pay the stipulated annual corporation or LLC fees and may need to renew your fictitious names every year, depending on regulations in your state.
You’ll only be assigned one Employee Identification Number (EIN), also known as an FTIN (Federal Tax Identification Number), which identifies your business entity. The profits and losses of your DBAs are reported through your LLC or corporation tax returns, which simplifies your administrative duties.
The other major advantage of this approach is that each venture has the same liability protection as your established business entity. The flipside of this is that they also share each other’s legal and financial debts – They are all liable if one is sued, or can’t cover its own bills.
Fictitious names are often referred to as DBAs, where the acronym stands for Doing Business As, or sometimes Doing Business Also – which is self-explanatory; you’re also doing business under each of these names.
Since costs and paperwork are kept to a minimum, this approach is recommended for new small business owners or those who only have a few active ventures.
Form Separate Corporations
If fictitious names or a single holding company seem like the wrong structural solutions for your business, you can choose to form as many individual LLCs or corporations as desired. There’s no cap on how many entities a United States citizen can form, so the sky is the limit.
None of your businesses will share each other’s risk or debts this way, and if your ventures are in totally unrelated fields, customers might have no idea the same person owns them. That means their brands and images are totally separate, too – so you won’t have as much damage control to do if something goes publicly wrong with one of them.
The major drawback here is that this model is more expensive. There are more start-up costs because each venture will be liable for business formation fees, and more ongoing expenses thanks to the mandatory annual compliance fees and forms.
Each of your LLCs or corporations will also require its permit, license, and EIN, and will have to file its own profits and losses – meaning far greater volumes of paperwork are required. But if you’re engaged in risky ventures, this is your best chance at limiting your liability and may well be worth the extra admin time.
As a small business entrepreneur, you almost certainly already know that no two situations are exactly the same. When you’re deciding on your entities’ structure, think about the ventures you have now and the kind you’d like to launch in the future.
Ask yourself these questions:
- Will you be subject to enough risk to make separate corporations worthwhile?
- Will all your enterprises be related, so that single holding companies are best?
- How much money, time, and manpower do you have to manage all the paperwork and records?
When you can answer these questions, consider what your priorities and resources are, and then assign a business structure accordingly.
Managing multiple small businesses under one company can be a relatively simple, straightforward undertaking. The structure you choose can cut costs, reduce taxes, and eliminate endless admin, or it can do the opposite.
Kristie Wright is an experienced freelance writer for Legal Zoom, where she covers various topics on the divorce process and life after divorce. When she’s not typing away at her keyboard, Kristie enjoys roasting her own coffee and is an avid tabletop gamer.