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 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…