Limited liability companies, or LLCs, help business owners limit their personal liability for business debts. LLCs are more flexible and have fewer recordkeeping requirements than corporations.
If you're thinking of creating an LLC for more than one business, or you want to invest in multiple enterprises, you may wonder whether you can own more than one LLC and, if so, what else you need to know.
When multiple LLCs make sense
It's not actually unusual to have multiple LLCs, either as a sole owner or as one of a group of owners, or "members," as they are called in an LLC. Owning more than one LLC may make sense if:
- Separate businesses. If you have two separate businesses, two LLCs can minimize your risk if one business fails. For example, if you own a successful construction company and then decide to open a restaurant, you could have one LLC for the construction company and start an LLC separately for the restaurant. If the restaurant fails, you may lose the money you invested in it, but you wouldn't be risking your construction company's assets.
- New product launch. You are launching a new product and don't want the rest of the company to be at risk if the new product is a flop.
- Partial ownership. You are already part owner of one LLC and decide to invest in another.
- You own rental real estate. Many landlords set up a multiple LLC structure, with a separate LLC for each building they own. This means their overall real estate holdings are not at risk if there's a lawsuit involving one building.
While it can be done, it's important to understand that owning multiple LLCs is more complicated than owning just one. Multiple LLCs mean additional paperwork and fees, additional tax forms, and the possibility of conflicts of interest.
Small business owners should weigh the liability benefits of having separate LLCs against the additional cost and administrative work required to maintain multiple LLCs.
Forming an LLC and maintaining multiple LLCs
To form an LLC in most states, the basic requirements in most states include filing articles of organization, appointing a registered agent, and paying a filing fee. An LLC also should have an operating agreement that describes how the LLC will be managed, as well as the rights and responsibilities of the members and managers.
Forming multiple LLCs means completing formation paperwork and paying a filing fee for each LLC. In many states, LLCs must also file an annual report and pay an annual fee.
Since each of your LLCs is a separate business, each must maintain its own bank account and keep its own financial and business records.
Avoiding conflicts of interest
LLC members may be obligated to place the LLC's interests ahead of their own and avoid creating conflicts between the two. This may mean that LLC members can't compete directly with the LLC, make secret deals with the LLC that benefit them personally, or secretly profit from LLC activities.
Owning multiple LLCs can complicate things because you may have a duty to both LLCs, and you must take care to avoid violating your duty to one LLC while trying to promote the best interests of the other.
For example, if you own a hotel and a linen supply company, you may want to help the linen company by giving it a contract to supply linens to the hotel. But because you would profit from the contract, you might be violating your duties to the hotel. In some states, deals like this are permitted if you disclose your conflict to other members and the members then agree.
The exact nature of an LLC member's duties varies from state to state. Usually, in a member-managed LLC, the members owe a duty of loyalty to the LLC. In a manager-managed LLC, the members owe a duty if they also act as managers. But in some states, LLCs are permitted to change or eliminate these duties in their operating agreements.
To avoid conflicts, be sure you understand your state laws and the requirements of any LLC operating agreements, and observe business formalities such as having members vote on important decisions. If there's a potential conflict of interest, make sure you disclose it and document any decisions that are made.
Managing taxes for multiple LLCs
If you're a member of more than one LLC, you will have additional tax forms to file. You must separately track income and expenses and prepare tax forms for each LLC you own.
- Single-member LLCs. Usually taxed in the same way as sole proprietorships, members report income and expenses from each LLC on a separate schedule attached to the member's personal tax return.
- Multi-member LLCs. Generally taxed automatically in the same way as a partnership, the LLC prepares an informational tax return listing overall income and expenses, and members report their share on a schedule attached to their personal tax return.
LLCs also can choose to be taxed as corporations. LLCs taxed as corporations must file the appropriate returns for the type of corporation they select.