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
It’s important to understand the tax consequences associated with creating multiple business entities.
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. Further more, 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.
Holly Magister, CPA, CFP
Holly also founded ExitPromise.com and to date has answered more than 2,000 questions asked by business owners about starting, growing and selling a business.
How do you recommend to structure a current single LLC that is planning to either license or franchise?
Hi Kacy,
There really isn’t anything to ‘structure” when you’ve already established a single (member) LLC. So I am not certain what you are asking.
If you are referring to the federal tax election that a SMLLC may make, the choices have many ramifications which must be assessed based on your specific set of circumstances.
One of those circumstances includes the type of income the entity will be earning and whether or not your ownership is considered to be active or passive.
There is no simple, one-size fits all federal tax election for any type of business. Unfortunately, it’s not a simple decision or answer.
All the best…
in an LLC how can one entity use the same TIN or have the same TIN as a so called lower entity? and why?
Hi Candy,
If you are referring to a business entity (LLC, Corporation or Partnership) that’s owned in part or all by an LLC as the ‘lover entity’, it is not possible for such business entity to have or use the same TIN (Taxpayer Identification Number / aka the EIN — Employer Identification Number) as its parent or holding company.
Every business entity must have its own TIN/EIN.
Hope this helps a bit…
Holly, thanks for all of your advice. I am in the financial industry in CA and receive 1099 income from my broker dealer (to my social security number) that I have been advised to assign to my joint (with my wife) LLC which is registered as a s-Corp. I then transfer funds from this account to another LLC I have set up 50/50, with my business partner, which we use as a management company to pay employees and business expenses. My questions are what do you think of this structure and if you recommend to prepare any type of agreements to assign the income or transfer funds between entities and if so which ones. Thanks for your opinion and advice.
Hi Joe,
I understand your BD won’t remit the commissions you earn as a financial advisor to the LLC. I believe it is because you are the individual advisor who is licensed and not your LLC. Correct?
When you receive those commission payments, it sounds as if you move them into an LLC which is owned by you and your spouse. Then you move the funds you need for operating your financial business to the LLC which is owned by you and a business partner. Do I have this right so far?
If so, here are my thoughts/questions for your consideration:
1. It is not clear to me why you transfer the commission payments you receive individually to an LLC owned by you and your spouse? When you have a business entity, it needs to have a business purpose and given what you’ve shared with us, I don’t see its business purpose.
2. The second LLC you’ve formed with your business partner for the financial advisory services has a business purpose, so that’s good.
3. If you skipped the first LLC and transferred all of the commission income you receive as an individual to the second (financial advisory service) LLC, you would need to have an assignment agreement between you and this LLC.
4. As for the advisory LLC you own with another person, you should have an LLC Operating Agreement that spells out the assignment of income and exactly what’s involved with the management services you and your business partner are providing.
5. Given the ownership of the LLC is with an unrelated business partner, you should also set up a Buy-Sell Agreement if it is not spelled out clearly in your LLC’s Operating Agreement.
You should consult with your attorney regarding these matters Joe! Again, you may have good reason for the first LLC you’ve mentioned in your questions. It’s just not clear to me.
And you will need legal documents to be drafted to address the relationships and payments between all of the parties involved.
If you need help, we are pleased to introduce you to an Attorney licensed to assist you in California. Here is where you may request further assistance.
All the best…
Holly, thanks so much for your reply.
I thought I would follow up with answers to your questions and see if you would change any of you recommendations.
Yes, payment is made to me by BD since my LLC is not registered. Your assumption is correct as far as the purpose for moving funds from one entity to the other. The clarification I would make to substantiate the two separate LLCs is that the LLC with my spouse is used as the service company where I am providing investment advice and management services to my clients. The deposit of funds from the BD are paid solely to me. My partner receives a separate payment for his services from the BD.
The joint LLC with both partners is used as a management company to employ assistants and pay expenses related to the joint operations. Each of our individual expenses are paid by our LLCs with our spouses. I will definitely consult with an attorney to draw up the agreements you recommended. With my expanded explanation would you now see a benefit to having the separate LLCs separating the services from the business management as the purpose? Thanks again.
Hi Joe,
Yes, given the scenario you’ve described it appears the LLC you’ve established with your spouse has a business purpose and it makes sense that both you and your business partner have established these.
You should consider with your Attorney having an Operating Agreement developed for both of your LLCs as they have slightly different purposes and members.
Buy-Sell Agreements are needed as well for both LLCs. If your spouse is not truly involved in the business, give some thought to what may happen to the income going into your LLC with your spouse if you were to divorce. Does that make sense?
And the management agreements should be put in place too.
Hope this is helpful as you prepare to discuss the further with your Attorney Joe.
All the best…
Hello,
I am in the commercial cleaning industry and have been for many years. I’ve landed in Kentucky and have been operating as a sole prop for the past 3 years. Business has really grown and I am now moving back to Tennessee where I owned a cleaning company (sole prop) and sold the accounts before moving to Kentucky.
Questions: What corporate structure do I form in Kentucky where the state and local taxes are higher than in Tennessee? TN has no state income tax, so do I form an LLC in Kentucky and an S-Corp in Tennessee where I would pay myself? Would one own the other or would they be individual companies in case of a sale?
Hi Steve,
The state in which you choose to form a business entity doesn’t determine which State Income Tax you will have to pay personally. The state in which you reside determines where you will be subject to personal income tax.
So, if you move your residence back to Tennessee, you will be subject to its personal income tax rules and rates.
As for the corporations, certain states have corporate taxes (even on S Corps). Every state is different. It may not be based on the income, instead it could be based on gross receipts or assets on the balance sheet.
So, the rules for the two states you are considering the formation of your business should be considered.
Another consideration for is is whether the services your business is performing are subject to sales tax collection from your customers.
These are a few things you should consider with your Attorney. We’d be pleased to introduce you to someone to assist you as you assess your particular situation. Here’s where you may request further help.
All the best…
I bought 100% of stock in a Kansas Corporation, S-Corp and at the same time bought 100% of all units of real estate which was formed as an LLC. The entire purchased was combined into one under a single note. Upon the close of sale, business was continued under the existing S-Corp name and TaxID. The purchase of both the stock and units are to be amortized over 20 years.
Do I file an 1120-S without any assets and a Schedule E to recognize the portion for the real estate units as rental income to myself as an individual and how does that asset then get recorded?
Hi Denise,
The answer to you question depends on whether the business purchase was considered to be a STOCK purchase (for the S Corp) and LLC member interests purchase (for the LLC) or alternatively as an ASSET purchase.
If the purchase agreement states you purchased the S Corporation’s stock from the former owner, when you file your first S Corporation tax return, you are simply filing the same tax return as the seller would have prior to the purchase. In other words, the assets, liabilities and capital on the books on the date of closing remain the same. You don’t set up a new set of accounting books and records for the business. Instead, the company’s ownership changed not the balance sheet.
Similarly, if the LLC’s purchase agreement states you purchased the members’ interest (and not the assets), your first LLC would include the assets, liability and capital as it was recorded on the date of closing. Of course, these figures would have changed somewhat since you’ve been operating the business subsequent to the closing date. And whether a Schedule E on your personal return is to be used for the real estate (LLC), would depend on how the LLC tax election was made.
If on the other hand the agreements were drafted such that you purchased the assets of these two companies, then the agreement should have spelled out the fair market value of each asset transferred to you. And those amounts would be recorded on your companies respective balance sheet as of the date of closing and subsequently depreciated and/or amortized.
The distinction between the two types of business acquisitions — stock vs. asset — is important as the two methods have very different tax consequences for both the seller and buyer. I’ve linked out to a post on this topic to help you further.
I hope this is helpful to you. If you need further assistance, here’s where you may request an advisor.
All the best Denise…
We are an LLC taxed as a partnership (P). The LLC has a 100% owned c-corp (A), which in turn owns 100% of two domestic c-corps (B & C) and 100% of a foreign corp (D). All c-corps file a separate Form 1120 and state returns, unless the states require a combined return to be filed.
My question is, can the C-corp (A) that owns the two domestic c-corps (B & C) filed a consolidated 1120 with B &C? Or is that disallowed since the ultimate parent is an LLC?
Hi Karen,
Yes, a consolidated tax return may be filed for your three companies: A, B and C.
The foreign corp (D) is not an eligible corp under the consolidated tax return rules.
The owner of A is not relevant when considering whether it’s possible to file a consolidated tax return.
To do what you are proposing, each subsidiary corporation (B and C) will need to file federal form 1122.
Hope the help you a bit Karen…
Hi Holly,
I own a single-member LLC but I am thinking of starting a new business in another state (not border states but several hundred miles away). Is it possible to have a holding LLC own 2 other LLC entities, each in different states?
Hi Keisha,
Yes, it is possible for a holding company (business entity) to own multiple business entities that are located and/or formed in other states.
All the best…
Does a business structure need to be the same as the accounting/tax structure? We have three LLC’s for liability purposes. The business structure is one for equipment, one for farm rentals and one for housing rentals. Our plan is to operate these with one reporting structure and file taxes on each individual LLC. This confuses me because we operate as one entity but for tax purposes are functioning as three. Thanks for your input
Dear Vernon.
Congrats on being a small business hero.
As a Concierge Law & Strategy specialist attorney, I limit my advice until I have a full understanding of your vision, mission, and values. That said, here are three helpful tips:
1. Confirm what federal status your LLCs are filing under because your tax concerns may differ if you’re filing as a single-member LLC/sole proprietor or as a partnership, or other.
2. LLCs are pass-through entities, so depending on your “shareholders” (better known as a Member), your tax structure should be appropriately reflected.
3. Legal structure does NOT have to align with the tax structure.
***Disclaimer** This response was prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. Attorney advertising. If you have any more questions, reach out to the team at ScotchPalm.com—fearlessly connecting the dots for entrepreneurs.
Hi i have 2llc’s and 4dba’s and planning to expand my exposure to lawsuits are rising , please tell me how to form a holding company to protect myself and my business, should i hold them with a living trust or another corporation,,,,
Hi Edward,
Asset Protection Planning is a comprehensive process where all of your assets and potential risks, liabilities are carefully examined before decisions are made about matters such as trusts, corporation, etc.
I am sorry this is not something we can weigh in on.
If you’d like to speak with an Attorney, please request one here.
All the best…
Dear Edward,
Congrats on being a small business hero.
As a Concierge Law & Strategy specialist attorney, I limit my advice before I have an in-depth understanding of your vision, mission, and values.
That said, here are (3) three practical steps/considerations:
1. Identify the types of legal liabilities you face. Often, it’s a matter of developing a set of appropriate business practices.
2. LLCs provide limited legal protection and you should ensure your daily practices maximize that protection. Meaning, read #3 carefully.
3. Work with expert counsel in your state to ensure that you’re properly protected, otherwise, a holding company, trust or other entity won’t be effective.
A graduate of Columbia Law School/London School of Economics and an expert in cross-border transactions, I am dedicated to fearlessly connecting the dots for entrepreneurs like you. I believe that small businesses with global ambitions deserve small business lawyers with global experience.
***Disclaimer** This response was prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. Attorney advertising. If you have any more questions, reach out to the team at ScotchPalm.com—fearlessly connecting the dots for entrepreneurs.
Hi Holly,
I heard from a wealthy man that I know, that I can have an S-Corp (John Doe Enterprises) as my operating entity with my kids as non-voting board members with each a $6000 salary and give them small job tasks to complete to justify their salary and also giving myself a $18,000 salary.
Also have multiple holding LLC companies under the S-Corp. such as a (web design business, and a credit repair company), but accept all sales funds for each business through the S-Corp.
Then I will only have to pay taxes on the S-Corp quarterly. But the S-Corp can also fund the holding LLC’s to pay their payroll and offset more taxes. What is your opinion on this.
Are there any holes that you see in this type of setup?
Hi Brandon,
Yes, it’s possible to employ your children in your S Corporation if you’d like to do so. It’s very important that they actually perform services for the business and you should document these activities in case your business is audited.
As for your salary, it must be considered a reasonable compensation for the type of work you are doing for the business. Determining what ‘reasonable compensation’ is not straightforward so you can’t assume that $18,000 per year would be considered an appropriate level of compensation for the role and work you are doing for your business. You will have to take a close look at your circumstances to feel comfortable that your compensation is truly reasonable.
The S Corp can own LLCs. However, they’re typically not considered to be a ‘holding company’. Holding companies own multiple businesses and it doesn’t seem to me that’s what you had in mind.
As for the taxes, your S corp will have to pay in your scenario…
The S Corp will have to pay payroll taxes on the employees, including your salary;
Any profit earned in the LLC’s will be passed through (or up to) the S Corp when the annual tax filings are done and the S Corp profit would flow through to its owner — and that’s you. So, you as an individual, will need to pay in quarterly your estimated federal and state (if applicable) income taxes.
Sales taxes you may be collecting from your customers would be remitted to the State/Local government for each business entity that collects the taxes.
Hope this is helpful to you Brandon… If not, please let me know. All the best…
I’ve taken your advice and would like to start a multiple business entity structures to hold multiple and varied business endeavours. how do I get started?
Hi Christopher,
Ideally, your first step should be to learn as much as possible about the various business entities you have to choose from when you set up your multi-entity structure.
We’ve just launched a new article series on startups to help you and other business owners with this.
The first topic covers business entities and may be found here.
All the best…
Hi,
I have 2 DBA’s that provide products in completely different categories,
and I have 2 separate business accounts for both of them. I’m thinking of forming a MAIN LLC, turning my separate DBA’s into LLC’s as well, and having them under my MAIN LLC, just so everything is a little bit more organized. What are your thoughts? Do you recommend this move?
Hi Casey,
What you’re proposing to do would provide yourself certain personal liability protection because as your businesses are set up currently, your two existing businesses are being operated as a sole proprietorship.
Sole proprietorships offer no personal liability protection. Here’s a post on the differences between an LLC and a DBA, which may be helpful to you.
It is possible to contribute the assets and liabilities (if they exist) to two separate LLCs and begin to operate the businesses with certain liability protections. Doing so would mean you’d need to terminate your personally-owned fictitious names (DBAs) and then form the LLCs with the same names, unless you desire a new name.
It’s likely your existing bank accounts would need to be closed or converted to a business account after all of the paperwork is done and you have a Federal EIN for each LLC.
As for the MAIN LLC you’ve proposed, I don’t see a need for it as you’ve described your situation. Maybe there’s more to it than I understand? If so, please let me know and I will offer you my thoughts.
Does this help Casey?
I am buying commercial building for parts store. And I will be buying parts and selling them to the parts store to resell retail.
Do I….
Make one LLC as main LLC
then make DBA for real estate and another DBA for the parts purchases? And do i have to have 2 separate bank accounts
Hi Nanette,
Generally speaking, it’s not a good idea to hold (meaning own) commercial real estate as an individual. Instead, most business owners form a business entity (corporation, LLC or partnership) which purchases the commercial real estate and another business entity for the business operation (your parts store).
Setting the multiple entities up will offer you (individually) certain liability protections and will also offer the commercial real estate company and your parts company protection if something goes wrong on the property or in the business and is sued.
Using fictitious names as an individual will not offer you any legal protections whatsoever.
Does this help?
IHello Holly,
I have 1 LLC and 5 DBAS to cover other business ventures. Only 3 businesses are in the same industry. I feel like the business assets are not protected with DBAS. As there is commingling of assets and liabilities. Do you recommend separation on the businesses? If so how?
Hi Jay,
It’s good that you are concerned and want to follow your instincts. And always good that you are asking questions!
I’d like to clarify one point. If all five lines of business operating under fictitious names (DBAs) under a properly-formed LLC, then the assets and income associated with each operation is part of the LLC. This situation is no different than if those assets and income were part of the LLC and did not operate under fictitious names.
Where the problem may arise is if ONE of the lines of business operating under a DBA in the LLC were to be sued, then the assets and income associated with the entire LLC (which includes the other four lines of business) may be in jeopardy because all five lines of business are part of the LLC.
Does this make sense?
If you desire to separate one or more of the lines of business from the LLC, you will need to work with your CPA and an Attorney. It involves identification of the assets and liabilities for each line of business, determining the tax basis, and then distributing to the members of the LLC. It’s not terribly complicated, however it’s not a DIY project if you want to do it properly.
Hope this helps a bit Jay…
Thanks Holly, yes this provided clarification.
That’s great Jay!
All the best to you…
We are a newly formed C Corp. We are looking at acquiring 3 S Corps in a stock sale. Is there a known effective entity structure? We are looking at having the 3 S Corps restructure as a holding corp LLC. We do not plan to transform these entities and expect them to operate day to day as normal.
Hi Joseph,
Your newly-formed C Corporation is not a permissible shareholder in an S Corporation. S Corporation shareholders must be a natural person so a C Corporation is not an eligible shareholder for the three S Corporations you intend to acquire.
Truly there are many ways you could structure these multiple entities and which structure makes the most sense depends on several legal and tax factors and what your operational and long-term goals are for the set of businesses.
If you’d like to consult with an advisor to address your specific needs, feel free to request help here.
All the best as you acquire these businesses Joseph…