The term “multiple businesses” connotes multinational corporations with intertwining ownership of many entities. But many entrepreneurs own and run two or more businesses; they may conduct these different business activities through various entities.
There are compelling reasons for operating different business activities through separate entities, but there are also reasons for running every activity within a single company. Here are the factors to consider:
From an administrative perspective, it may be easier and less costly to run a single entity. In this case, all of the income and expenses from the separate activities are taken into account for a single entity; a single tax return is filed. This saves on accounting fees.
However, not all activities may be suitable to be joined in a single business. For example, a business coach may operate for years as a sole proprietorship, then acquire a strip mall that she put into a limited liability company (LLC). Theoretically, both could operate under the LLC, but from a marketing standpoint the separate entities make more sense.
There are usually no bars under state law to operating different activities within a single company, but separate entities are a way to create the utmost personal liability protection for owners. It’s standard operating procedure for building owners to hold each property under a different LLC or corporation. This strategy ensures the assets of each separate company are protected in case there are any lawsuits against a particular one. For example, if an individual owns two small motels, each under a separate corporation, and there is any legal action against one, the other is fully protected.
In some states, it is possible to use series LLCs (also called cell LLCs) in which a group of LLCs are run under an umbrella company. This saves on administrative costs but protects the liability of each LLC cell. Such action is permissible in Delaware, Illinois, Iowa, Kansas, Missouri, Montana, Nevada, Oklahoma, Tennessee, Texas, Utah (to a lesser extent), Wisconsin, and the District of Columbia.
There may be tax reasons for separating businesses into different entities:
- Tax year. Depending on the nature of the activity, it may make sense to operate one on a calendar year and another on a fiscal year.
- Passive activities. If you are viewed under the tax law as being a passive investor, then operating losses may not currently be deductible. However, if you operate multiple activities within a single business and materially participate, the losses effectively offset profits from other activities in the company. What’s more, these passive activity loss rules are used to determine exposure to the net investment income tax (the 3.8% additional Medicare tax). Note: The passive activity loss rules are highly complex so discuss your situation with a tax pro.
- Sale prospects. While you may not have it prominent in your mind when you start a business, your end game should be a factor in deciding whether to separate business activities into multiple entities. For example, if you own a dental practice and the building from which it operates, it’s usually advisable to keep these in separate entities. The practice can lease the space, but separating the ownership into two entities allows you to decide to more easily sell the practice while keeping the building.
- Estate planning. You may decide to give interests in an LLC to family members and cede ownership and/or control to younger relatives. Again, this is more easily done by segregating business activities.
If you own more than one C corporation, they likely are subject to “controlled corporation” rules that trigger special tax treatment. Some of the treatment is disadvantageous (e.g., sharing tax brackets, the Sec. 179 deduction), but there are some benefits as well (e.g., minimizing payroll taxes for an employee who works for more than one of your corporations).
Don’t forget to review state tax implications to having a single or multiple companies. If your state imposes a tax for operating a business, a single entity reduces this 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 make the costs mount up.
So should you run your multiple businesses under a single entity or use multiple solutions? There’s no single answer for every situation. Discuss your activities and concerns with a knowledgeable attorney who can advise you on the better course of action to take.