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Entrepreneurs are known for recognizing and pursuing many opportunities in the marketplace simultaneously or in a serial fashion. In fact, such entrepreneurs may be referred to as serial entrepreneurs.
It is not unusual for such serial entrepreneurs to create a multiple business entity structure to hold multiple and varied business endeavors. Doing so is commonplace and provides certain limitation of legal liability for the serial entrepreneur. Such business entities may include a Limited Liability Company (LLC), C or S Corporation, and/or Partnership. Each in its own way protects the entrepreneur’s personal assets from potential risks such as lawsuits and other claims against the business. In recent years, the practice of forming layered, multiple business entities has gained increased interest among entrepreneurs desiring to start a new businesses.
Large Businesses Form Multiple Business Entity Structures
Check out the website of your favorite fast food chain and you will see most have multiple business entity structures noted in the fine print. For a large business, this practice has been commonplace for decades. It involves layering one form of a business entity either alongside or in conjunction with an operating business. The layered, multiple entity structure strategy would look something like this:
- One entity is established to serve as the ‘operating’ business and holds very few assets on its balance sheet.
- Another related business is established to hold valuable assets such as patents, trade secrets, software, websites, and other intellectual property and serves as a ‘holding’ company.
- Likewise, real estate needed for operations may be held in a separate entity.
- In simple terms, the enterprise assets are separated from the potential liabilities in the same business enterprise by placing them in two (or more) separate business entities. Such multiple business entity layering necessitates careful drafting of legal agreements between the various entities involving items such as leases, licensing agreements, management agreements, etc.
Tax Consequences of the Multiple Business Entity Structure
While creating multiple business entities may afford the entrepreneur an opportunity to separate liability exposure in his business from his personal assets and the assets of his other business endeavors, certain tax consequences can and will follow.
LLC’s, Partnerships and S Corporations offer pass-through taxation treatment.
The C Corporation is taxed at the entity level as well as the personal level when dividends are paid to the individual shareholders.
All tax consequences should be considered carefully when choosing the form of business entity, regardless of the number of entities formed by the entrepreneur. Layering multiple entity structures may include one of the following entity combinations:
- An LLC owning multiple LLC’s
- Limited Partnership owned by a General Partner (another entity) and Limited Partner(s)
- Individual S Corporation owned by a Single Member LLC
- S Corporation owned by a Limited Partnership (with all individual partners)
- S Corporation owned by an S Corporation with one individual shareholder
- C Corporation owned by another C Corporation, Trust or LLC
It’s worth noting that each business entity has its own tax consequences at the federal and state level. When considering the entity structure, whether forming multiple entities operating in tandem or layered multiple entities, it is wise to consult with both legal counsel and a tax advisor familiar with the appropriate state’s corporate and tax laws. Furthermore, care should be given to the decisions related to how assets should be titled and recorded on the multiple business’s accounting records. Asset titling or ownership issues will be important when one or more of the businesses is ultimately sold.
Hello,
So I currently have a S Corp. that I formed in 2016 and I use that for a DBA, (cleaning buis.) I also have a small coffee buis that has its own DBA that I now want to attach (be protected) by the S corp. I look at my S corp. as an umbrella that protects the cleaning buis. and I also want that protection over my coffee buis. How do I do this? Thank you for your time!
Hi Rhonda,
It sounds to me that you formed an S corp and it’s name is something that covers your cleaning business. Yes?
And you have personally filed for a DBA (fictitious name) that covers the coffee business. Yes?
If so, and if you want the coffee business to be part of the S corporation while keeping the same fictitious name, then you’d transfer the assets of your coffee business to the S corporation, terminate the fictitious name for your coffee business and have the S corp apply to use the coffee business’ fictitious name.
You can’t use the fictitious name for the coffee business while your S corporation uses it.
Before you consider doing any of this, you should consult with your business attorney. Each state handles fictitious names differently and you may have to register/change information at your local government level as well.
Hope this helps…
How would I file taxes on my LLC which owns two DBA’s. The DBA’s are in two different brother’s names, one each?
Hi Sally,
If your LLC is a single-member LLC, meaning you’re its only member, then you’d file a Federal Schedule C for each business with the name of the business (fictitious name/DBA) and the EIN you obtained for each respective LLC.
If you solely own an LLC that’s filed for two fictitious names (which is what I think you’re saying), it’s not possible for two others (different brothers) to own anything related to the LLC. You own the LLC, not the brothers.
If there are two brothers that have filed for fictitious names to operate a business, then that business is a sole proprietorship that they would need to report on their respective tax returns (again, it would be a Schedule C). Your LLC can’t own their sole proprietorships.
Hope this clarifies things for you.
If not, ask again and I will give it another try…
I have a CA C corp of which I am 100% owner. Four different unrelated product lines have matured to the point of commercialization. I plan to form LLC for each line in a low tax state and an offshore holding company trust for all IP. In addition, a recently formed Florida S Corp (2 shareholders) is poised to make significant sales earlier than expected and I don’t have time to get other pieces in place before being hit by a sizable tax obligation. Eventually I plan to leave California, but there is no time before getting hit by taxes. Is there a way to establish a single owner LLC somewhere like Wyoming that owns the S Corp shares and then in turn is owned by a LLC treated like a corporation in order to park profits outside of California until I can leave?
Hi Dave,
Firstly, congrats on your success!
There are likely several ways for you to structure your business entities, however if you have a presence in the state of California (or any other state for that matter), avoiding income taxes is unlikely.
States require businesses with a presence (called nexus) to register and pay certain types of taxes.
I recommend consulting with an Attorney and CPA to properly design your business entity formation/structure and to be certain you are not creating a tax problem or unnecessary complexity in the long run.
All the best…
What is the best structure to setup a stock trading company? I currently have an LLC 90% myself and 10% my C Corp as partners within the LLC (stock trading co). I am 100% shareholder of the C Corp. I was informed there were tax deduction benefits that can be used from the C Corp hence setting up a combination between the two companies. Is this viable? Or is there a better setup to ease my tax burden?
Hi M.J.,
There are hundreds of ways to set up a business if you want to use a combination of business entities for your new business.
Choosing which is best for you depends on your goals and personal situation so it’s not possible to provide you with an answer. I am sorry.
I suggest starting with your goals and then discuss it with an advisor who understands the legal and tax aspects of the various business structures.