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 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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I have been trading stocks the last few months, but I am not a day trader.
I am an active investor, about 100 trades per year. Can I trade via a C corp
and get tax benefits? For example, tax deduction for equipment and supplies, services, professional memberships, etc.
Thank you
Maria:
While trading stocks in a C corporation may sound like a good idea, there’s actually nothing good about it. A corporation provides tax and legal protection, but in your scenario, it doesn’t do either.
If you are not a trader or trading stocks for clients, you are not needing legal protection. Furthermore, since this is not a business, you can’t really deduct your expenses of trading.
To make matters worse, you would be subject to double taxation at the highest rates and net capital losses in a C corporation can only be used to offset capital gains.
In short, not only does a C corporation not help, but it brings more onerous taxation!
Hi – I’m planning to start a series of film festivals around the US. I’m thinking of creating a holding company and having each festival be a separate operating company. Can I create the holding company as an LLC with an S-corp tax treatment and also create the operating companies as LLCs (owned by the holding company) with S-corp tax treatments? Or does the holding company need to be set up as a different business structure in order to own the operating companies? Any advantages/disadvantages to this setup? Also, the festivals will held in states other than the state I currently reside in. Thanks!
Hi Diann,
There are a couple of questions/areas of concern in your scenario…
It is possible for S Corps to own another S Corp if it’s set up as a QSub. All of the S Corps have to be owned by the same owner or set of owners and they must be qualified to own an S Corp.
No, a holding company does not have to differ by its business entity formation from the business entities it owns (or holds).
When you have businesses operating in different states, you will need to be concerned about registering those businesses as a foreign entity and filing the appropriate tax returns each year.
You will also create ‘nexis’ in those states by way of operating in them which means you will need to collect state (and possibly) local sales taxes.
Finding an attorney and tax advisor will be very important so you set things up properly!
Here’s a source for you, in case you do not have these resources.
All the best…
Hello and thanks in advance for this Q&A section.
I am a licensed architect as well as general contractor. I currently have my architectural business structured as a professional S-corporation, and my construction business structured as an LLC. I would like to form a design/build entity in order to simplify branding/marketing. Per a previous comment you responded to on this website, I learned that the S-Corp can “own” the LLC, if it is a single member LLC, and can file both businesses under one tax return. What is the recommended way to combine my design / build services while not over complicating my tax filing? I would like to file all three business in one return ie umbrella entity, and two sub entities (design & build).
I own a manufacturing LLC, a new business friend of mine wants to work together but their are several customers that require work be done only in house, no outside work, 1 vendor. This is potentially a lot of work. Is it best to create a third LLC we have equal ownership in? and in doing this will my assets and their assets be protected from either party if a falling out would occur?
Hi Tony,
I get it. No subs contract.
Forming a separate LLC may work to address this obstacle to work with your friend. That said, forming a new business is a serious undertaking and you’d be tied to him/her legally. Give that some thought.
If you do choose to form the LLC with your friend, be certain to really think through your LLC’s Operating Agreement and include provisions that will address how you’d buy one another out. Do that now. If you think it won’t happen, you may be very disappointed later. Lots of war stories to support that advice.
Equal ownership can be very problematic.
A separate business entity will provide you and the other business partner certain liability protections. Not all business entities provide the same protections and so it’s imperative to discuss your valid concerns with a skilled and experienced small business attorney.
Here’s where you may find one to help you.
All the best Tony…
I have been running an ecommerce business as a sole proprietor for 2 years. I recently got back into computer programming and started an S Corp for the consulting business so I could pay myself an actual salary. The S Corp was profitable day one and makes good money while the ecommerce business is just now becoming profitable. I have about $20k in owners equity in the ecommerce business that I would like to be able to pay myself back at some point (preferably tax free), but it doesn’t currently have that amount to pay out. I am now wanting to create a business entity for the ecommerce business. Can I (and should I) create the ecommerce LLC as a wholly owned subsidiary (not sure if this is the right term) of the S Corp or should I create the ecommerce LLC as owned by me but taxed as an S Corp? I will be selling the ecommmerce LLC at some point in the near future.
Hi Aaron,
Congrats on your successful business launches! Two of them!
Yes, you can take the ecommerce’s assets and liabilities (you own individually as a sole proprietor) and contribute them to a newly-formed LLC.
And yes, if you desire the S Corporation (consulting business) to own all or some of the newly-formed LLC, indicate so when forming the LLC and drafting its Operating Agreement.
It’s not clear to me why you want to do so based on how you’ve asked the questions, so it’s difficult to say if forming the LLC with an S Corp Tax Election makes sense instead.
Could you clarify?
If your intention is to sell the ecommerce business, it really doesn’t matter if you own it or if the S Corp owns it. However, if the S Corp is an LLC Member (owner) the gain and cash proceeds from the sale would have to travel through the S corporation and be taxed and distributed through the S corporation. That’s messy and would require more effort than if the LLC is a stand-alone business entity owned 100% by you.
Hope this helps Aaron!
Thank you for answering my question Holly! I am consolidating several businesses under the S Corp umbrella. The S corp will act as a gateway for the cash flow from all of the businesses eventually.
For this specific scenario, the S Corp will be performing certain services for the ecommerce LLC (marketing, property management, small business loans, etc.) and charging for its services.
In the near future, the S corp will be acquiring a large boat and spinning off a Delaware LLC as a holding company for it. In addition, the S corp will be opening an operating company to charter trips on the boat. The S corp will sell advertising space on the boat to the ecommerce LLC as part of it’s services (charging the ecommerce LLC for the arrangement and allowing the boat holding company to pay off the boat) and will lease the boat to the charter LLC.
Had I done a little more research initially, I would have setup the S corp as an LLC with S Corp taxing status, but I’m learning as I go. 🙂
Hi Aaron,
Okay, I understand a bit better now.
When you form an LLC and elect S Corporation Tax treatment, you are dealing with a different type of tax structure.
If it’s a plain vanilla, Single Member LLC, the income and expenses are reported on your personal income tax return (Schedule C) and the net income is subject to self-employment taxes in addition to federal (and possibly state and local income taxes too).
If you elect S Corp tax treatment, you will need to take income out of the LLC in the form of Payroll / Wages. That’s a different animal. So, give that some thought.
Regardless, you have an S Corporation and you will need to address the IRS’s Reasonable Compensation rules.
All the best…
Hello,
I currently own an LLC transportation company. I am looking to create a separate LLC vehicle dealer company to lease vehicles to the transportation company. While this seems to be advantageous for taxes…can I, as the sole owner, sign a lease agreement for both entities?
Thank you!
Cody:
Yes, you can create multiple LLCs and yes you can sign a lease agreement from one entity as the lessor and the other as the lessee.
There may be asset protection considerations for doing this, but I really don’t see any tax advantages, assuming you are the sole owner of both LLCs.
If you’d like to discuss how your business(es) can benefit from true tax planning, feel free to contact me.
If already own dba but want to create a new s corp and put the existing dba under that. And if we add any more DBA then do we use s corp as dba name same question when using existing dba thank you
Judy:
A dba is not a thing that you can “put under” an S-Corporation. A dba is nothing more than a name of a business. It is NOT an entity.
If you own a sole proprietorship, you can convert the assets to the S-Corporation and start your business as an S-Corp. You can name your S-Corp as a similar name to your DBA, OR you can re-register the DBA name as being owned by the S-Corp rather than by you individually.
I have 3 businesses: 1) home health LLC ; 2) hospice LLC; and a private duty LLC. All 3 LLCs have their own EIN#s. I want to create a new LLC to manage all 3 businesses: administrative and payroll. Should I apply for a different EIN for the management company for tax purposes? What would the relationship be between the 3 LLCs and the management company? Please advise.
Hi Maria,
If you form an new LLC for admin and payroll, you will need to file for its own EIN because it is a business entity.
When preparing payroll reports, the new LLC’s EIN would be used because the new LLC would be the employer.
The three LLC’s should have a management agreement with the new LLC to address the administrative and payroll-related services it is providing to the three LLCs.
I’ve attached a link above to a service that can help you with this. {Affiliate disclosure — Exit Promise may receive small payment if you use this service. If you do, you won’t pay a penny more. It helps us to cover our overhead. Thanks! }
All the best…
Hello,
I have a multi office healthcare business. We currently have S Corps for each office and do not have a centralized structure at the moment.
I have been trying to find advice on how to structure my entities to simplify everything. I have been contemplating the following:
1 PLLC for payroll expenses which employ’s all my medical professionals & staff.
Keep the S-Corps for each of the offices and set up a C Corp that is paid a management fee from each of the S-Corps and ‘centralize’ process of paying bills/expenses from the C-Corp- but still keep track performance of each office separately. This will minimize the tax liability at the individual level, and the C-Corp will take the tax liability for profits, etc. The C Corp will have a separate C/C to pay each different office’s expenses and that is how the tracking will happen for each office – the management fee paid to the C-Corp will be based upon the receipts of each individual office. I do not plan to take many distributions from the C Corp and plan to keep expanding my offices using the proceeds from my offices.
I was curious what your recommendation would be. I am tired of dealing with inter-company receivables and creating a huge headache when it comes to figuring out the accounting for my business – and as we grow, I want to ensure we have a simpler way of doing the accounting work for each of my offices.
Sagar:
It sounds like you have a complex enterprise going on. I would like to invite you for a free initial consultation to discuss your situation. Frankly there isn’t enough space to discuss a specific resolution here because we would want to discuss many factors before just throwing a solution out there. Since you are in healthcare, the analogy would be that you probably don’t have doctors just writing scripts based on the patient filling out an information form. Also, this is a public forum and it would be inappropriate to discuss a personal situation with confidential data here.
Things to think about before deciding how to structure your enterprise include tax protection, legal and asset protection, and exit strategies. These are all complex interconnected ideas, but sometimes the best strategy for tax protection may not be the best for asset protection and vice versa.
Just “simply the whole thing” may be counter to your goals. So let’s discuss how we may be able to help.
Here’s where you may learn more about how I may help you.
Best Regards
Need LLC
real estate ASAP I have one domain already.
I have another domain I want to use for home and health products I use and my inventions.
Don’t want to spend $ on 2 LLC’s but want the protection for both. How do I structure that 1 owns the other?
If I use my name on the second I don’t need a dba? They both are unrelated so do I get a holding company LLC like, Cherry Holdings? A Dba for buyorsell… and use cherrylassen as is? Both with seprarate bank accts. How do I structure those 2 under my LLC to be fully protected? (Unless you see a better way.)
Cherry:
I would never advise for you to have two separate business run under one LLC. While this may save you a few bucks in the short-run, it opens you up for double-disaster if something should not go right. If you have “inventions”, you may have product liability issues that you don’t want to spillover and affect your other business.
Therefore, it is my recommendation that you don’t try to stick multiple businesses under the roof of a single LLC. Giving one a different name does not change the legal protection.
I am a Film/Television Editor who works 80% of the time for the Studio as a payroll employee and 20% on side jobs for directors cutting reels and other side jobs. Should I incorporate?
Hi Kimberly,
The decision to incorporate or to form any type of business entity generally is based on the need to protect personal assets. Other reasons include the desire to appear to customers/clients in a more formal or official way and/or the need to bring on investors or other owners. Based on what you’ve shared, it’s very difficult to tell if forming a business entity is necessary.
Here’s a post about business entities that may be helpful to you as you explore your options.
All the best…
I am in the process of establishing a parent LLC in Florida with subsidiary LLC’s established in other states but all reporting up through to the parent LLC. Any issues with this structure?
Would the subsidiary states need to file state tax returns in their states or does that all happen at the parent level?
Hello, first of all thank you for your service! I have a multi-use building (apartments on top and business on the bottom) both are under two different LLCs, both started in 2019, both have loses and no gains. Should I file both businesses under my personal income tax return?
Tiffany:
An LLC that is owned by a single person that has Not elected to be taxed as a corporation, files that LLC as though it did not exist. Since this is a rental property, you will use Schedule E attached to your 1040.
If the LLC has MORE than one member, you must file as a Partnership and complete Form 1065.
You generally cannot retroactively change to a different entity or filing type after the year has ended.
Our firm specializes in tax work and strategies for real estate investors. Let us help you find the most efficient way to avoid paying more tax than necessary!
We would like to create an Umbrella Company that includes our 3 children (ages 26, 24, and 17) as owners/shareholders
Under this umbrella would currently include a catering business and a coaching business
Trying to determine if an Umbrella Company is the correct next step? Should the Umbrella be an LLC or a Corporation to positively impact the children tax-wise?
Would the umbrella be protected if there are LLCs formed as legal structures over the multiple businesses that come under this in the future?
I hope this makes sense.
Hi Joy,
What you’ve described in your question does not offer a good reason to form an additional business — the umbrella company.
Without a compelling reason to form another layer of complexity, banking and reporting requirements, I am a fan of keeping things as simple as possible.
I always recommend forming a business entity (and a separate one for each) when starting a business. It’s just good planning to shelter personal assets from your business.
All the best…
You’ve got
How would you handle tax preparation for a single member LLC who has a parent and 3 – Subsidary LLCs? The subsidiaries are all rental properties.
Hi Latonia,
The income (or loss) from the subsidiary LLCs would flow up to the parent as would the SMLLC.
All the best…
My business partner and I equally own a parent LLC in Wyoming which itself owns our subsidiary LLC in CA. Structured this way for anonymity. We are based in CA but our business is all online.
Because of that, when I applied for an EIN for the CA LLC, it was required to be designated as a sole proprietorship (the one owner being the WY LLC). The Wyoming LLC EIN was designated partnership with my business partner and I as the two members.
My question is… since the two LLCs are basically for anonymity and serve the singular online business we run, can I take payments through either LLC/tax ID or must I go with the CA LLC and then somehow reflect that on another return for the parent? My tax preparer is in CA but he doesn’t seem quite certain on this situation either.
Currently I own 5 coffee shops and file all under one corporation. For better protection should I create 5 different C corps and keep 5 different sets of books. Will I need to file 5 corporate tax returns at the end of the year or can I instead file a consolidated tax return?
Hi Chris!
Any entity, has at its heart, two primary purposes–tax protection and legal protection. So when you say “for better protection”, let’s take a look at these two areas.
From a legal perspective, if you put multiple activities in one entity, anything within that entity structure is at risk for something that happens within the entity. If you have 5 coffee shops in one corporation and somebody’s tongue is burned by your coffee, they can sue you and the assets of all of the coffee shops within that single entity are at risk. If each coffee shop is a separate legal entity and someone is hurt in one shop, they cannot blame the other 4 shops that had nothing to do with the incident and the assets of the other 4 shops are safely within their own protected entities.
Now, your insurance agent will step in and tell you that you can buy insurance to protect against certain losses or risks, but your risks may be much broader than a customer accident–such as an employee or investor issue. So, consult an attorney first as to how much protection you need in your business that having separate entities can help you with.
As for taxation, having separate C corporations does nothing to save on taxes. A profit of $20K in each of 5 shops is subject to a flat 21% tax rate. If you had a $100K profit in 5 shops all within one C corporation, you pay the same flat 21% tax. No savings whatsoever. Plus, if you had 5 corporations, you’d have to have 5 year-end tax returns and you’d have to have 5 separate payrolls.
As a tax guy, though, I’d have a different take on this altogether. I’d want to know why having a C-Corp is your choice in the first place? There are legitimate business reasons for having a C-Corp, but under the current tax scenario in the US, I’d want to re-evaluate whether that’s the best tax move now. The situation may have been different when you organized your business than it is today!
I own 2 S-Corps. S-Corp A owns 2 LLCs (divisions). S-Corp B does not own anything other than the principal activity. How can I move 1 of the divisions from S-Corp A to S-Corp B?
Hi Jim,
It’s likely you could transfer one LLC to the other S Corp via a tax-free exchange.
You will need the assistance of a tax accountant or CPA and an Attorney who has experience with such transactions. It’s not a DIY project!
If you don’t have such professional advisors, feel free to request help here.
All the best…