As your business grows, you may find that you need to establish divisions within your limited liability company (LLC). But you should weigh the pros and cons before you begin changing the internal structure of your business.
Why You Might Want an LLC Division
Setting up divisions within your LLC is the simplest option for the entrepreneur who owns an LLC and wishes to expand their business. For example, you might want to set up a separate division to:
- Launch a new product or service line
- To deal with a particular geographic region or a specific target market
When you add divisions to your LLC, you're changing your company's internal structure. Whether you need to file legal paperwork or change your operating agreement depends on how you'll be running this new division. But even if you need additional filings or amendments, it will still be a simpler process than incorporating a new company or setting up a new LLC to operate your new line of business.
How LLC Divisions Work
Adding a division to your LLC lets you separate the activities associated with your new business so you can track its growth and profitability while maintaining only one overall entity.
One way to look at how divisions work is to think of them as being similar to departments. Much like departments help separate operational functions—such as accounting and HR—a division can help keep various lines of business separate from each other.
Advantages of an LLC with Divisions
Operating multiple lines of business under one LLC offers a number of advantages:
- Cost-effectiveness. When you add a division to your LLC, you won't have to go through the process of setting up a full-fledged company, whether in the form of a corporation, partnership, or another LLC. Even if you want to run your new business line under a trade name that's different from your company name, it will be less work and less costly than setting up an entirely different business entity.
- Less maintenance. Because you'll be keeping your new businesses within your LLC, you only have to maintain that one business entity's annual fees, filings, or disclosures. For example, you will only need to file taxes related to your business, rather than for each of your divisions, as all divisions are seen as part of one entity.
- Testing new business ideas. Adding a division lets you test out new business ideas quickly and easily. Depending on how you'll be operating the new business line, you may be able to have your new business division up and running right away.
- Shared resources. Since the new business line stays within your LLC, you can use your existing resources to help run your new division. For example, even if you'll be developing a different brand for the new line of business, you can easily have your marketing team work on both the existing business line and the new business line.
Disadvantages of LLC Divisions
Running multiple businesses under one LLC does have disadvantages:
- Liability risks. Many business owners choose to run a business as an LLC because of the limited liability it offers. But if you run separate lines of business as divisions of the same LLC, each division is exposed to the liability risks of all the other divisions. Let's say you initially set up your company to run and operate a vacation rental property and later add a residential apartment complex as a new division. If a tenant injures themselves and brings a negligence lawsuit against your business, your vacation rental property isn't protected from liability.
- Restrictions on future transfer. If you decide to sell the new business line, it will be more challenging if it isn't a separate legal entity. Even if you have different accounting books for each division, the divisions are still intertwined, making sale of a specific division that much more difficult.
- One business entity. Even though you're keeping separate internal books for each division, the losses of one division affect the profits of the others. Let's say you need to raise capital for your initial business line, which has been seeing a nice profit. If another division is struggling to be profitable, this may be an issue for potential investors.
- Amendments to the LLC operating agreement. If you need to add new members to your company as a result of adding a new division, you will need to amend your LLC's operating agreement. Additionally, depending on the current wording of the operating agreement, you might need the approval of all current members of the LLC to make such an amendment.
How to Set Up LLC Divisions
Once you've weighed the pros and cons, the process of setting up new divisions is fairly simple. Depending on how you'll be running your new division, the steps involved include:
- Establish new trade name. If you intend to run your new division under a trade name that's different from your LLC's legal name, you'll have to make the proper business name filings required by your state. Individual states refer to the process in a different way. In some states, you'll need to file for a DBA (“doing business as").
- Separate accounting systems. You'll most likely want to keep separate books for your new division. Keep in mind, though, that even though you keep separate accounting books internally when it comes time to file with the Internal Revenue Service (IRS), you'll file as one entity.
- Open a separate bank account. In most cases, you'll want to have a separate bank account set up for your new division; doing so will enable you to more easily track the finances associated with your new business and keep expenses and profits separate from an internal perspective. Note that if you are running the division under a separate trade name and want to set up your bank account in that name, you'll need to do the appropriate business name filings first.
- Obtain permits and licenses. Check what permits and licenses are required to run your new line of business. If your business doesn't already hold the necessary permits, you will need to apply for them.
- Update your LLC operating agreement. If you are making changes to the operating structure set out in your operating agreement, you'll need to amend the agreement. For example, if you're bringing on someone to run the new division, you may need to add them as a member, or amend parts of your agreement to reflect their new role in your LLC.
Adding a division to your LLC is one of the easiest ways to expand your business or add a new line of business. But depending on your specific circumstances, it may not be your best option.