It takes a special kind of person to start a business: a rare combination of drive, ambition, creativity, tenacity and impatience for action. But even within the community of business experts and entrepreneurs there is a special breed of person known as a “serial entrepreneur.” Speaking from experience as a serial entrepreneur myself, I find that once you’ve experienced the excitement and fulfillment of figuring out how to start and grow a small business, you might find yourself wanting to do it again.
Whether you’re starting your second business, or expanding your business empire to include multiple brands or categories, you need to give some thought to how to legally structure multiple businesses. There are various options with different levels of complexity. One of the simplest solutions might be to keep each business separate. If you own multiple businesses, there are several reasons why you should incorporate your business with a legal entity. Choosing the right corporate structure can help you grow a business without exposing your personal assets to the liabilities and worst-case scenarios of business ownership.
Legal Structure of a Business Options
Start a business the right way – by protecting your personal assets, limiting your risk and presenting a professional, credible image for every business you own. Choose the legal structure of a business that is right for you:
LLC: The Limited Liability Company (LLC)
The LLC is often a simple and popular choice for entrepreneurs looking to incorporate a business because it involves less formality and regulatory reporting requirements. By incorporating each of your businesses as a separate LLC, you get the benefits of having a corporate shield over your business to protect your personal assets. In case any of your businesses gets sued, the judgment cannot go against your personal savings, retirement, home, or college fund for your kids. The LLC is considered a “disregarded entity” by the IRS, so the company does not pay taxes – instead, the company’s earnings “pass through” to the owners, who then pay taxes at their individual tax rates.
The S-Corporation is another popular choice among small business owners, with over 3 million S-Corporations in existence in the U.S. One advantage of the S-Corporation is that it might help the owners reduce their self-employment tax liability. S-Corporations are ideal for small groups of partners (in fact, they are limited to only 100 partners), but they can only issue one class of stock, and cannot issue publicly traded stock. So if your goal is to grow a business to the point that you can make an IPO, or to raise venture capital, you’re better off choosing the next option for a corporate structure, a C-Corporation.
The C corporation is the ideal choice if you want to grow a business to potentially attract venture capital, since the C corporation structure enables you to issue multiple classes of stock, and venture capital investors often want to receive preferred shares with special rights and benefits.
The C corporation legal structure of a business will require the business itself to pay income taxes on profit before distributing cash to its shareholders. This requirement is known as the C corp double taxation and is one reason why many business owners shy away from this structure.
A General Partnership is formed without any filings or applications to the State when two or more individuals start a business. This simple fact surprises many business owners! And a General Partnership offers its owners (partners) absolutely zero personal legal and financial liability protection.
For this reason, most business owners who prefer the simplicity of a partnership formation for their business, file the formal paperwork necessary to establish a Limited Partnership. A Limited Partnership offers the limited partners liability protection to the extend of their capital contribution or balance. This is more palatable to most business partners and is often preferred over a General Partnership.
As you start a business, whether it’s your second business, third, or more, you should carefully consider the legal structure of a business and forming some type of business entity to achieve certain legal protections. Doing so may protect you and your family from the “worst case scenarios” associated with business ownership. Even the most dedicated serial entrepreneurs need to be mindful of the risks and downside of entrepreneurship, and protect against them.
You can read more in part two in this series about How to Structure Multiple Businesses under a single business entity.