When your clients have more than one business, the way they structure those companies will have legal and tax implications that you can help them with.
Let's take a moment to discuss the options your clients have for setting up multiple businesses. Note that this information is not meant to replace legal guidance from an attorney or your tax expertise, but rather to help you understand the potential advantages and disadvantages of each approach so that you can help your clients make the right choice. Their success can depend on it.
Generally, three options exist for clients who want to run more than one business:
Create DBAs for each line of business under a single LLC or corporation
Form each business as its own separate LLC or corporation
Create a separate LLC or corporation for each business and then put them under a holding company
Which one of the above approaches will serve a client’s needs the best will depend on various factors, discussed below.
1. Create DBAs for each line of business under a single LLC or corporation
This involves having one LLC or corporation and then setting up multiple DBAs (Doing Business Also known as fictitious names) for the other ventures. So, for example, if your client has formed an LLC for “Josie’s Salon and Spa,” and then she wants to start a personal image consulting business, the LLC could file a DBA for something like “Josie’s New You Image Consulting.” This would enable Josie to market and manage each business line separately (each could accept payments and write checks in its independent name, etc.) while simplifying ongoing compliance because there is just one formal business entity to maintain.
Typically, in this situation, the client would need to pay their annual fees for their LLC or corporation and, if required, renew their DBAs each year. The client needs just one EIN, and each DBA’s profit and loss gets reported through the LLC’s or corporation’s tax returns.
Also, each DBA gets the same personal liability protection as the client's LLC or corporation. That added peace of mind for the client makes the DBAs under a single entity an attractive option for many small business owners who want limited liability without a lot of administrative headaches. Keep in mind, however, that DBAs are not insulated from each other's legal or financial debts. If one DBA or the LLC or corporation gets sued or can't pay its bills, all are liable.
2. Form each business as its own separate LLC or corporation
Another option that your clients might want to explore is to form individual LLCs or corporations for each business. With no limit to how many entities a person can form, many entrepreneurs choose to create independent LLCs or corporations for their multiple companies.
This approach separates each business, therefore isolating the risks of each to its own liabilities—not the liabilities of the other companies. So, in the case of our earlier example, if someone were to sue Josie's New You Image Consulting, Josie's Salon and Spa's assets would not be at risk in the lawsuit.
Likewise, the image consulting business would be protected if the salon and spa business ran into legal or financial hardship. Real estate investors often use this approach, forming an LLC for each property that they own, to shield each of their investments from potential liabilities of the others.
A disadvantage of starting separate LLCs or corporations for each is business is that your client will have more business formation and ongoing annual compliance forms and fees to file. Also, each business will need its own business licenses, permits, and EINs. Plus, as you know well, there are more tax forms because each company must file its profits and losses separately.
3. Create a separate LLC or corporation for each business and then put them under a holding company
Clients in the following situations may find structuring a holding company with subsidiaries beneath it a beneficial approach to having multiple businesses:
a. Wants to spin-off one of their businesses or have their company acquired.
b. Wants to start a new business and have their existing company fund it.
This option comes with more "moving parts" and legal and tax complexities than the other two that we've discussed. It's vital that you advise your clients on the financial implications and encourage them to talk with an attorney so that they understand how it will affect them from a legal perspective.
No One-Size-Fits-All Answer
Every client’s circumstances will be different from another’s, and they must understand that many variables come into play when deciding on the best way to handle setting up multiple businesses. As your clients’ trusted advisor, educate them using your expertise and point them to the right resources to round out their knowledge so that they can make informed decisions that will position them for success.