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.
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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.
- Â 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.
I have 4 s-corps at the moment. Are there any tax benefits to having a master S corp own all the entities versus keeping them as individual s-corps? besides the extra paperwork, are there any overlapping taxes I would be paying?
Sir Judge:
An S-Corp is a pass-through entity for tax purposes. If you have S1 pass $1000 of income directly to you, or if you have S1 pass $1000 to S2, then S2 passes the $1000 to you, you still have the same $1000 of income. There is no tax benefit or penalty to having an S-Corp own another S-Corp. There may be other reasons, but taxes are not one.
Hi, I am forming multiple LLCs which will all be owned by the same two entities in the same % for each one. These multiple LLCs will all own/operate a store of the same retail-brand, and will all have a “partnership” tax status, thus would be pass-through entities. My questions are:
1. Would all these LLCs, all operating one store each, be considered branches of the same company given their “pass-through” status?
2. Given that these LLCs’ tax status is “partnership”, would taxation occur only at the owner level?
Thanks!
Javier:
If you form multiple stand-alone entities, then they are NOT branches of the same company. There is a difference between the legal protections afforded by an entity (which is formed at the state level) and the tax protections or rules which are at the federal level. The only thing that “pass through” to the owners is the tax liability, NOT any legal liabilities.
An LLC that is taxed as a partnership passes its income to its partners. Tax is only assessed at the partner level.
There may be better ways to structure your business activities. talk to us, or talk with an attorney about how you can structure your business(es) optimally.
Hi,
I have a client who has 3 businesses; currently all sole proprietorships. One is her realtor business, one is property management, and one is a condo owned and rented through Air BnB. She would like to limit her self-employment taxes and take a salary. Should she form an S-corp and then a dba for the realtor and the property management businesses or can she combine those two businesses under the S-corp without doing dbas? And should she form a separate LLC for the rental property?
Thanks for your assistance!
Geneva:
Operating all these businesses as sole proprietorships opens your client up to both tax and legal problems that can be mitigated in a myriad of ways. Yes, S-Corps can help, as can LLCs, and C-Corps, but finding the optimum mix of how all these tools work is not as easy as me saying “yea–go with the LLC!” Google the question, and I guarantee that Mr. Google says “go with the LLC because it’s easier to manage!” But there’s more to it than that!
If your client was building cabinets, you already know that a hand saw is slow and inaccurate; but would you recommend she buy a table saw or a powered miter saw first? And what type of accessories go best with each type?
For these reasons, there is no question your client should get herself to a pro-active tax advisor, fast! She will be surprised at how generous she’s been with overpaying Uncle Sam.
If your client would like a free review of their situation, I would be happy to oblige.
There is gross sales dollar cap that is placed for Cottage Food businesses in my state. I want to sell both baked goods made in my home under the Cottage Food Law, as well as sell tea and related accessories…both the baked goods and the teas/accessories would be sold in an online store but picked up in person. In order for the sale of the tea and accessories not to count towards the gross sales cap placed on the home baked goods (Cottage Food), would it be best for me to create two different DBAs under one LLC or is it safer to set up two different LLCs?
While I am not in a position to properly advise you of the laws in your state (which state?), I can tell you confidently that if you have two (or fifty) DBA’s under one LLC, then that is ONE business. Period. A DBA is not a stand-alone business.
Each state has its own laws and limits. You can find limits here: https://cottagefoodlaws.com/#what_are_the_limits_on_total_sales
Some states have limits as to total sales out of a home (in other words, no matter how many businesses you divide the sales into). Other states limit sales per product. Colorado, for example, says no more than $10K per year per product. Are cookies with a cherry on top a different product than cookies with a nut on top? (Answer: I don’t know!)
My dad has two single member Passthrough LLCs for his farming business. The operating LLC rents farm land from the second LLC and grows crops. I’m just doing a little research if the rental payment income and expense can be canceled out between the two LLCs for tax purposes.
Hi Matt,
If the two LLCs are single-member LLCs and are both owned by your dad, by default the rent paid is reported on the operating farm business as rent expense and on the rental business as income. The first is reported on his Schedule C as an expense and the second is reported on his Schedule E as income. All of this shows up on his 1040.
So, the rent expense offsets the rent income.
Does this make sense?
Two questions for you: A friend and I are developing a product for market. All our sales will be through e-commerce. Is it necessary to form our company in the state where we reside and what is the downside of a Business Trust vs. LLC
Thank you,
Hi Jason,
It is not necessary to form your business in the state in which you and your friend reside. However, if you choose to form it in another state you will likely be required to register the business in the state (as a foreign business entity) you and your business partner work because you’d have nexus in the state. That’s a fancy way of saying you’ve got presence in the state so the state where you reside will want to be certain it gets its share of any taxes it is due.
There’s a big difference between a business trust and an LLC and it should be explored with your attorney before making a decision to form one or the other.
Generally speaking, business trusts are used when your objective is to remove the business from your estate and ensure its benefits go to your heirs. Whereas an LLC is a business entity and once formed it’s an asset that remains as such for its owners. If the owner dies, the LLC (member units) are an asset of the deceased’s estate.
Again, there are other considerations to discuss with your attorney Jason!
All the best…
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I am a first time producer/director of a feature length movie. The project began as a student short film collaboration for the purpose of gaining film making experience for the cast and myself as we did not anticipate having the funds to complete a feature length movie which after several years we were able to do. Although we did not expect to make any money on the movie we did put forth in the collaboration agreement what percentage of profits each cast member would receive in the event we made any money from the movie. My question is can I set up a sole proprietorship to distribute the movie and a limited partnership with myself as the general partner to the cast as the limited partners to pay out any money due them?.
Vincent: As a business owner, you can make up whatever (legal) rules you want. But changing the rules “after-the-fact” does nothing but anger all the other investors in your business activity. From a business model point of view, having a partnership subject to the whims of an overriding sole proprietor would create an accounting and management nightmare! Since a distributor collects all the money from venues and media sources, the sole proprietor can easily declare “sorry–no profits to distribute” because that’s where all the money would come from for the partnership, if I understand your setup. These two businesses are not “independent” of one another. But, if the question is solely “Can you do it?”, then the answer is “your deal—your rules”.
Hello Holly!
I know I’m just “small potatoes” in the world of business, but will ask my question anyway… Currently, I am a Sole Prop running a portrait photography biz, using a DBA, “La Mia Voce”. I am also a graphic designer/illustrator and occasionally take in freelance work. Additionally, I am starting to design products (print-on-demand coffee mugs and other things) to sell. What should one do to legally organize all of these odds and ends income for tax purposes? Should I just keep passing everything through on my personal tax forms because I’m a sole prop? Do I need different names/entities for my graphic design services, vs. my products I’m selling, vs. my Photography business? What do I do when I want to begin marketing my wares? It doesn’t make sense to “bundle” them with my photo services—different audience and so on.
Currently, my photography biz is “La Mia Voce Photography and payment for my design services are just made to me. But what about banking, taxes, etc.?
Advice?
Hi MeDrawGood,
Most entrepreneurs in your situation find a common brand to use for business formation or DBA purposes. This helps them with marketing, banking and when it’s time to file income taxes.
With a common brand name, you can always choose to create other brands that operate under the main brand and register their trademarks if they’re valuable.
All the best…
I want to have three llc companies that offer different services. Is it possible for them to all fall under my enterprise with the same logo and different names while all being registered as three separate businesses? I want them to all have my seal.
Hi Talia,
It’s not completely clear to me what you mean by ‘my seal’. If seal is a logo, then yes.
Think about McDonalds.
McDonalds three golden arches are one of the most recognized logos in the world.
For every location where the golden arches sit, there is a business that is likely its own business entity (such as an LLC, corporation or partnership).
The name of the McDonalds business entity in your town may be something like “McDonalds Your Town, LLC”.
Again, this logo usage case is very common.
However, you have stated in your question that each business entity would be offering different services. That makes it much more difficult to develop a good, clear marketing brand.
And that’s because your branding messages for the single logo would be split into three different services.
Hope this helps…