It's situation that comes up quite frequently among entrepreneurs. Your limited liability company (LLC) is doing well, and you find yourself with several new ideas for viable-sounding businesses.
If you're already successfully running one business under your LLC it might seem like a reasonable idea to start a second business under the same LLC. But is it?
Multiple businesses under one LLC?
It may be tempting to start up that second business under the umbrella of your current LLC, but it often isn't a wise business move.
While operating both businesses under one LLC may offer you some shortcuts, such as simpler business administration and only one annual filing fee, in the long run, these shortcuts are probably not worth the increase in potential risk.
An increase in potential risk
The advantage of an LLC is the limited liability it affords its owners. When you run two separate businesses under two separate LLCs, the assets and income of each individual company is also protected from any liability risk which might affect the other company.
If you combine two businesses within one LLC, however, the assets and income of each business are no longer isolated from each other, and each is at risk of any legal claims that might be directed against the other.
Say you run an editing business using the same LLC that operates your dog walking business, and one of the dogs you're walking gets injured while under your care. It's not just the assets and income of your dog-walking business that will be exposed to liability.
The assets and income belonging to your editing business will also be exposed to any legal claims which might be filed against your dog walking company as a result of the incident.
Separate LLCs make sense
While it might seem tedious or require additional effort to set up a separate LLC for your new business idea, it's often a better route to take than running both businesses under your current LLC.
There is a bit of paperwork involved in forming an LLC, but the benefits of doing so far outweigh the increased risk of running two businesses under the same LLC.
Additionally, setting up an LLC is not an overly complicated business, nor is running and maintaining one. If your new business idea is a viable one, it pays to put thought into the long-term now and set up a separate LLC for it.
LLC holding company
There is, however, one scenario in which it might make sense to have two businesses under one LLC—the case in which you're using your LLC as a holding company. A holding company LLC is an LLC that doesn't have any operations; its main task is to own other companies.
Can an LLC own another LLC ?
You may be wondering: can an LLC own another LLC? Most states do not restrict who may own an LLC; if your state does not restrict the ownership of LLCs, it means an LLC may be owned by an individual, a corporation, or another LLC.
How does it work?
An LLC that serves as a holding company does not run any operations of its own. Its primary task is to hold the ownership of other companies. In most cases the holding company LLC will also own most of the assets required to operate the other LLCs it owns. These other companies then lease the use of these assets from the holding company LLC.
For example, if the holding company LLC owns an LLC that runs printing operations, the holding company LLC might also own the printing equipment required by the printing company to run its business. The printing company in turn leases the printing equipment from the holding company.
By structuring matters in this way, you obtain two levels of protection. The LLCs owned by the holding company LLC provide limited liability to their owner, the holding company. Since the holding company is also an LLC, it provides its owners with limited liability protection.
It does require a certain level of effort to maintain a proper holding company LLC structure. It's important that each LLC—the holding company LLC and the LLC(s) it owns—be properly maintained, with required government filings kept up to date.
It's also important that accounting, property, and income be kept separate in order to keep the limited liability protection afforded by each LLC intact.
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