Entrepreneurs, by definition, are entrepreneurial. They don’t necessarily limit their business activities to a single endeavor. Some may have one business venture after another—serial entrepreneurs. Or they may run various business activities at the same time. How to handle having different activities simultaneously impacts business operations, legal matters, and, of course, taxes.
Consider these strategies for managing multiple businesses
When to conduct multiple activities as separate businesses
Whether to run multiple activities as separate businesses all depends on the situation, but factor in business reasons, legal concerns, and tax implications.
Business reasons. It may be administratively advisable or even necessary to run businesses separately. For example, say a computer consultant operating as a single-member LLC also has an active eBay business. From a marketing perspective, it probably does not make good business sense to conduct the eBay activities through the same LLC, even though it could be done. Using separate businesses may also be a good idea if there are different investors involved in the different activities.
Legal reasons. Separate entities are a way to create the utmost liability protection. Typically, building owners form separate LLCs or corporations for each property. In this case, it is not the owner’s personal liability that is being protected in case of lawsuits, but rather the assets of the properties on which the liability did not arise. For instance, say an individual owns two small motels. If there is a legal action against one motel, the other can be at risk unless each is a separate legal entity.
Tax reasons. There may be some tax reasons for separating businesses into different entities (e.g., choosing to operate on different tax years or with different accounting methods). It may be helpful in some situations to use a separate entity to own real estate that will be used by the business. This allows the owner to make decisions regarding the real estate without involving the business. For example, a single owner of a dental practice run as a professional corporation may buy a professional building, using an LLC. The practice can lease space from the LLC, but the owner can decide when or if to sell the building. Or, for estate planning reasons, the owner may decide to gift interests in the LLC to family members and cede ownership and/or control to younger relatives. As long as the terms of the lease are fair (i.e., a reasonable rent is charged), the practice can deduct its lease payments even though it is the dentist who is ultimately receiving the rents as owner of the LLC.
When to run multiple activities within one business
There are usually no legal bars to running multiple activities within a single entity. In fact, some activities can naturally and logically exist within a single entity. For example, a beauty salon may provide grooming services and sell beauty products using a single business. This makes sense. This can be done, for example, using a single entity or a holding company, with different activities run by different divisions, each with its own name. Reasons to run multiple activities within a single entity include:
- Savings on legal and accounting costs. A single entity cuts down on the cost for entity formation as well as ongoing costs for accounting and tax return preparation (especially for pass-through entities operating in more than one state).
- State tax savings. Where state law imposes a tax, a single entity reduces franchise or other annual tax costs. For example, California charges an annual fee for LLCs (in addition to the annual fee on their revenues), so using separate entities can get pricey.
When multiple businesses are aggregated
For certain tax rules, separate businesses may or must be aggregated—lumped together and treated as one—to determine whether and to what extent certain tax limitations or other rules apply. Examples:
- Employer mandate to provide minimum essential health coverage to full-time employees
- Qualified business income (QBI) deduction
- Retirement plan requirements and contributions
Aggregation applies when an owner directly or indirectly owns a certain interest in a business. Aggregation rules vary with the situations to which they apply. For example, for the QBI deduction, owning 50% or more of each business for the majority of the year (including the last day), plus meeting other requirements, permits the use aggregation—something that may be favorable for optimizing the deduction.
Special aggregation rules apply to corporations. These rules treat multiple corporations as members of a controlled group, which are subject to special limitations.
Final thought
The more you do, the more you have to think about, right? The only way to resolve the decision on how to handle conducting multiple business activities at the same time is to discuss your situation with a knowledgeable adviser (attorney, CPA, etc.).
