Holly also founded ExitPromise.com and so far has answered more than 2,000 questions asked by business owners about growing and selling a business. She also offers consulting services to business owners as they choose their M&A advisors.
- Does the Stage of My Business Matter When It’s Valued? - April 28, 2022
- What the Great Resignation Means to Your Business - April 19, 2022
- What is Exit Planning? - November 22, 2021
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In part one of this series, we discussed the various options to incorporate multiple businesses while keeping each business as a separate entity. It’s worth noting that having a separate legal business entities can be costly when it’s time to file your taxes as most CPAs charge an additional fee to file each business entity’s tax returns.
Additionally, you may want to develop a line of businesses that are closely related in terms of the products and services offered, the industry, or even its customers. In such a case, it may make good sense to create a single brand that will unify the various business operations. Marketing can be simplified under this type of multiple business structure and the businesses could flourish under a unified brand.
If you find your future plans include the addition of similar lines of business to your existing business (or the business entity you are about to form), there may be a simple way to structure multiple business entities which could reduce tax filing costs and administrative time in the future.
How to Structure Multiple Businesses Under a Single Business Entity
- First determine which type of business entity you’d like to form:
a. Limited Liability Company; or
b. Corporation (an S or C Corporation); or
c. Partnership. - Determine if the business trade name you’d like to use is available in the state in which you choose to form a business entity.
- If it is available, determine if the trade name has been federally trademarked by another party. If so, go back to the drawing board!
- If it is available for your federal trademark registration, consider filing for it after you launch your business.
- Form the business entity you’ve chosen in the state in which you choose. If you choose an LLC, you will need to draft an Operating Agreement. If you choose a Corporation, you will need to file Incorporation documents.
- File all of the necessary start-up documents and public notices with your state and local government (if applicable).
- File for a Federal Employer Identification Number (EIN) for the business entity.
- Make any federal tax elections necessary.
- Under the business entity, apply for a fictitious name for any other lines of business you’d like to operate under the umbrella of the business entity you’ve formed.
- Check out our Startup Checklist for your new business to make certain you take all of the necessary steps.
Example of Multiple Business Structure Under a Single Business Entity
If you have a business that manufactures shoes in New York called ‘Soho Shoes, Inc.’ and you’d like to offer speaking engagements to shoe designers under the trade name Soho Shoes Speaks and start a blog about the life of a shoe designer at SohoShoesMusings.com, you could hold all these lines of business under one company.
To do so, the incorporated business known as Soho Shoes, Inc. would apply for two fictitious names (or DBAs) — one for Soho Shoes Speaks (for speaking engagements) and another for Soho Shoes Musings (for the blog).
It’s important to note that before your business files for a DBA or Fictitious Name, you should verify that your use of the name does not violate another party’s intellectual property rights. You don’t want to get into trouble and have to start over again after your start marketing your products and services to potential customers.
This multi-business structure example is really one business entity with three different marketing or trade names. So, it’s relatively easy to co-market the related lines of business while minimizing the tax reporting requirements. In my book, this structure saves time and money and that is always good!
What Does Filing a Fictitious Name Mean?
When your LLC, Corporation or Partnership has filed for a fictitious name, the state has given permission to the business to use a trade name for marketing purposes which differs from the business entity’s legal, or official name. It’s really that simple.
The fictitious name certificate does not create a separate business entity so the line of business operating under a DBA is part of the business entity which filed for the DBA.
You will not be able to sell member shares in the LLC, stock in the Corporation, or partnership rights in the Partnership for one of the lines of business which operates under the fictitious name.
And if you choose to sell one of the lines of business operating under the fictitious name, you will have to sell under an asset sale agreement as only part of the business entity will be transferred to the buyer. This can be tricky to do if the accounting books and records for the multiple lines of business have not been kept separately. So, seriously consider keeping separate banking and accounting records for each line of business under this multiple business structure if you think you may sell your business in the future.
In part three in this series, you may explore alternatives to using a single business entity with multiple fictitious names (or DBAs).
I am a prospective business owner looking for some information. My circumstances are unique enough that a general Google search isn’t answering my questions. I am in the process of developing an education platform to be launched as a web application. This business will operate as an LLC, nothing too out the ordinary. I am also looking to setup a 501(c)(3) private foundation alongside the LLC to assume a portion of its revenue and distribute it in the form of philanthropic grants. My question is: is their a business structure that allows both of these companies to exist under one roof, or will they just have to remain separate entities in the face of the law? (Can a LLC and a 501(c)(3) coexist under one business structure) Any insight you have on this would be useful and greatly appreciated.
Thanks,
Hi Drew,
It sounds to me that you intend to take a portion of the revenue from the LLC (web app) and contribute it to a non-profit (501 c(3)) and you’d like to know if the two entities may be owned by another single, separate entity.
The short answer is no.
And that’s because a non-profit (under any code section 501) may not be owned by anyone or any other organization. Its purpose must be for the benefit of whomever or whatever group is identified to serve its organizational purpose. So its reporting of net income is not subject to income tax and is meant to be paid out for the benefit of the defined parties. That ‘party’ may not be a person, owners, or another for-profit entity.
There is no reason you can’t simply form an LLC for your web app, form a non-profit for the purpose you define and allow them to operate separately.
It’s not clear why you’d need to have another entity to own the two. What would that accomplish for you?
Happy to weigh in further if I didn’t fully understand what you’re trying to accomplish!
Thanks for the information. The reason I was interested if the two companies could exist as child companies of one parent is because they will share marketing materials, UI elements, among other things. I guess a good example of this would be products such as Google Cloud and Google Search. They are both separate companies run by the same parent, and therefore share a lot of the same ecosystem wide standards. The difference here is that they are both for-profit companies and aren’t reliant on different tax codes.
this man has a building. he built several small stores inside the building. we each pay a monthly rent to him. there are maybe 150 stores inside . i have a jewelry store. i file taxes. i have been there 2.5 years. now we have found out there is a lawsuit against the owner of the building and the rumor is every store owner will have their stores locked up with the entire building and we will lose everything. is this true.
Hi Ethel,
Rumors are just that. I wouldn’t make a business decision based on a rumor.
That said, it’s probably a good idea to review the lease with a business/real estate attorney that you have signed with the landlord. Your rights as a tenant should be spelled out in the lease terms.
Generally speaking lawsuits take a long time to work through the courts. If the rumor is true and a lawsuit is pending against the landlord, a judge would be involved in the case’s outcome. A judge would consider any possible negative ramifications in the case, including how the outcome may affect the building tenants carefully. So you have time and an impartial judge on your side.
Again, speak with your attorney to learn what your rights as a tenant may be.
Hoping all turns out well for you Ethel!
If I own multiple companies, including the building the companies occupy, how will my paying tax be affected?
Timmy:
Each legal entity has to follow its own tax rules. Depending on the entity type, it may either pay tax as an entity (C Corporation), or its income/loss will pass through to your personal tax return (S Corp, partnership, or disregarded entity).
It’s not clear from your question as to what you mean by “how paying tax” will be affected.
I would like to keep the same Sole Proprietor EIN# and turn it into a LLC in Texas or I have and Inc that’s just sitting and use my Sole Proprietor under it
Larrymi:
An LLC is legally a SEPARATE entity from a sole proprietorship. However, IF your LLC is a single-member entity and you do not elect to have it taxed as a corporation, it is therefore a disregarded entity for tax purposes and does not need a different tax ID number. You would not have a sole proprietorship “under” the LLC. The LLC is TAXED as a sole proprietorship, meaning you file Schedule C with your individual tax return.
So are you saying that I can use the same EIN# as long as I don’t do the LLC under a corporation but under a single-member? If so does that protect my personal belongings?
Hi Larrymi,
I’ll chime in here…
The EIN you have that’s associated with you (Larrymi), belongs to you and can never be associated with another person or business entity. In other words, you can’t transfer your personal EIN ever.
If you choose to form an LLC, the LLC will need to apply for its own EIN.
If you have a corporation already established, it should have its own EIN. That corporation cannot “own” your sole proprietorship. A sole proprietorship can never sit under (or be owned) by anyone else or a business entity. It’s you and will always be you!
I am assuming you have a business you currently are operating as a Sole Proprietorship and you’d like to gain certain legal protection by having an LLC or using the corporation you’ve already formed.
To accomplish this, you’d transfer all of the assets (fixed and intellectual property) and liabilities associated with your sole proprietorship to either the new LLC you form or the existing corporation. Then you’d file for an EIN for the LLC or use the EIN for your existing corporation.
IF YOU DO NOT CHOOSE TO ELECT AN ALTERNATIVE TAX TREATMENT FOR YOUR LLC, by default you have a single-member LLC which would be reported on your Schedule C (just as you’ve been doing as a sole proprietor in the past). The difference would be that you’d use the LLC’s EIN and not your personal EIN.
IF YOU CHOOSE TO ELECT FOR THE LLC TO BE TREATED FOR TAX PURPOSES AS A DIFFERENT ENTITY (C CORP, S CORP OR PARTNERSHIP), then your LLC would be reported on and 1120, 1120S or 1065, respectively.
IF YOU CHOOSE TO USE YOUR EXISTING CORPORATION, then you’d file the corporation’s tax return either as a C corp (1120) or S corp (1120S).
Forming the LLC or using your existing corporation will provide you with certain liability protections.
Hope this clarifies things a bit for you.
All the best…
We have a company that is lawn care. We have other things that we do that is growing. We need to separate now. I was thinking of a Enterprise and putting others under it. So, the umbrella company would be Webb’s Enterprise…..Under it would be Webb’s Lawn Care/Landscape……… Webb’s Construction………Webb’s Excavation. How would you set that up?
Connie:
There are many options for setting up multiple businesses.
You could set up an LLC that owns the other LLCs.
You could set up a corporation that owns other corporations. You may not even need or want to have a parent-child relationship in your businesses.
Your question is too broad for us to give you specific advice in a public forum. I would recommend that if your business is “growing like a weed” that you take some time to build your businesses right and get the personal attention you need from both an attorney and a tax advisor. It is well worth the time and expense to get personalized advice in this situation.
Combining 1099 incomes into Scorp.
My fiancee and I are both self employed 1099
We both are I’m the insurance industry I am the broker of the business. We have been looking into a Scorp. Can we have both of our income from the 1099 go straight in the scorp and have the scorp pay us a w2 employees?
Meaning combining our income since we are already working as business partners?
Hi JP,
I believe the insurance industry will not pay an S corp for commission. Instead they only pay licensed insurance agents.
This means the checks won’t be payable to your S corp, if that’s the business entity you choose to form.
One way around this would be for you to deposit your commission checks into a personal checking account and then write a check payable to your S Corp.
The 1099 would be reported to you individually. The check payable to your S Corp would be deductible and the S Corp would then have income to report on its tax return.
Be certain to get/keep professional liability and E&O insurance for your business that covers all of your agents.
Does this help?
Thank you for clarifying that
Happy to do so Joel!
If I currently have an S corp, and wish to create a secondary S corp (with my original S corp being the “owner”) how would I go upon doing that?
Hi Amy,
What you’ve described is known as a QSub S election.
The ownership must be identical for each S corp and you will need to file IRS Federal election forms (8869).
Hope this points you in the right directions.
Please consult your CPA before doing so…
All the best.
I do furniture repair and upholstery and I also restore vintage cars. Can I have both these under one umbrella as an S corporation?
Patty:
Short answer–YES! You can do any legal business activities under your S Corp.
Better question: Do you really want to mix 2 separate activities and risk a lawsuit from one activity causing financial distress upon BOTH businesses? Because if not, then you ought to consider having 2 separate entities.
If I were to keep both businesses under One S Corp umbrella, what is the business activity?