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.
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…