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Structuring Business Entities with Shared Expenses

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Figuring out how to structure multiple businesses can be tricky, especially for new entrepreneurs. In this article, Nellie Akalp of CorpNet breaks down the options for setting up a company's legal structure and the filings your clients should know about to avoid financial issues in the future.

Nov 19th 2021
CEO and Founder CorpNet
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It's increasingly important for entrepreneurs to understand how a company with multiple entities should handle shared expenses, and how a company with multiple entities should be legally structured to avoid issues with shared expenses in the future. Every company has unique circumstances, so it’s critical for business owners to get professional accounting and legal advice tailored to their exact situation. Here is some insight to help your client figure out which approach will work best for their company.

Handling Shared Expenses 

Business entities that have shared expenses must properly allocate those expenses between the entities according to the approved percentage allocation of the designated expense or direct expense from the invoice. In addition, a company with multiple entities needs to do one of the following:

1. Appropriately record and track the shared expenses using intercompany “Due to/Due from” (receivables/payables) accounts. They must include associated payments related to the Due to/Due from shared expenses. Or, 

2. Record all expenses to one entity. Then, that entity issues invoices to the other entities for their portions of the shared expenses.

How to Structure a Company with Multiple Entities That Share Expenses

From an accounting perspective, there is no specific legal structure required for sharing expenses between businesses. However, business owners should contact a legal professional to determine if the shared expenses could cause any legal issues.

Generally, three options exist for setting up the legal structure of a company with multiple entities:

1. One LLC or Corporation with Multiple DBAs 

In this scenario, all the companies are treated as a single business entity, legally and for tax purposes. However, business owners can market each individual business line separately under a unique name if they file for DBAs ("doing business as") with the state (or county). These "fictitious" names can then be used to differentiate the individual businesses (including having bank accounts with their names on them). Because all of the businesses are considered one company, each is liable for the others’ debts and legal issues. 

2. Separate Legal Entities for Each Business 

This involves forming a partnership, LLC or corporation for each individual business. Each business would need to file registration forms with the state, obtain an employer identification number (or EIN, also known as a federal tax ID number), apply for required business licenses and complete other startup and ongoing compliance requirements. In other words, each individual entity operates on its own and has its own set of legal and tax obligations to fulfill. A potential advantage of this approach is that it isolates the risk to each individual business since the companies do not have liability for the debts and legal issues of the other entities.

3. Holding Company with Separate Business Entities Beneath It

A holding company is an entity that owns the assets of its subsidiary companies (partnerships, LLCs or corporations). Typically, even though a holding company has ownership and may oversee some management decisions of its subsidiaries, it does not participate in running day-to-day operations of the individual companies beneath it. This way of structuring multiple businesses is common among entrepreneurs who have an existing company that will fund one or more new ventures. It’s a more complicated approach, however, and it’s important to understand the tax and legal implications of using it.

The Importance of Research and Professional Guidance

Structuring multiple businesses and selecting the right entity types requires research and getting reliable information. The IRS website provides extensive information and explanations about federal tax rules and regulations. States’ Secretary of State offices and tax agency websites are other informative resources.   

Of course, your clients would be wise to look to you for the professional guidance you can offer about their specific situation and goals. If they need guidance that’s beyond what you may provide, refer them to trusted professionals in the appropriate specialty areas. You can play an essential role in their success by helping them get what they need to make informed decisions.

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