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Should You Consider Splitting Your Business?

| Dec 24, 2020 | Business Law

A business owner can have multiple businesses under one LLC but when is the right time to split them into multiple LLCs? Yes, it’s more bookkeeping than you might otherwise need to do. Taxes will have to be filed for each LLC, rather than one larger cumulative whole. Handling business licenses, EINs, and fees can be time consuming and costly. Business owners have a lot riding on this decision. Serious considerations should be made before making decisions that can affect their long-term success. So, when is the right time to split your multi-business LLC? And do those benefits outweigh the disadvantages?

You may want to split your business to further limit liability. An LLC is already a limited liability company but making a different LLC for each new business further divides and limits any possible liability between companies. This strategy can be appealing to those who want to isolate each business’s legal and financial risks to its own liabilities instead of assuming the risk of all business operations.

One drawback of starting and maintaining separate LLCs or corporations is that each entity must formally register with the state, obtain an EIN, taxes, registered agent, etc. However, this is where weighing in potential long-term success and security comes into play.

Multiple LLCs are easier to sell or close when it is time to do so. When you have several different businesses under one LLC, it becomes a complicated task to separate the paperwork, the assets, and the contracts linked with one of those businesses when you want to sell it. If you have multiple businesses, each as its own LLC, all that extra paperwork actually becomes a benefit. It becomes a lot easier to sell or close the business without affecting the other operations.

You may want to consider forming a holding company for additional protection. Typically, a holding company doesn’t manufacture anything, sell any products or services, or conduct business operations. Rather, holding companies hold equity in other companies, its subsidiaries. Holding companies, if structured properly, are protected from losses accrued by subsidiaries. So, if a subsidiary goes bankrupt or is sued for debts, its creditors can’t go after the holding company.

Circumstances will vary widely, we recommend consulting with trusted legal counsel when exploring how to set up multiple businesses. You’ll want to consult with a business lawyer and accountants to make the appropriate decision for your situation.