Should You Form More Than One LLC for Your Business?
There is no law that limits the number of LLCs an entrepreneur can own. Forming multiple LLCs may make sense under certain circumstances: for example, companies that have several rental properties, separate businesses with common ownership, or when one business makes more money or has more assets than the others. Separate business entities may also be beneficial when it is time to launch a new product or sell a single company from a business portfolio. However, establishing separate LLCs will increase administrative burdens.
Benefits of Forming Multiple LLCs
If you have multiple business ventures, forming more than one LLC may provide the following benefits:
Enhanced liability protection. LLCs provide limited liability to their members because they are a separate legal entity from their owners: as a result, creditors of the business cannot satisfy the business’s debts by pursuing the owners’ assets. This liability shield ensures that LLC owners cannot be held personally responsible for the business’s actions and debts (except in very limited circumstances). Similarly, forming multiple LLCs to hold separate business assets or for separate business ventures also provides protection for each of the businesses because each LLC is only liable for its own debts and obligations, not those of the others.
Cleaner segmentation. If an owner has multiple businesses and each is organized as a distinct LLC, when it is time to sell one of them, it is much simpler to transfer the assets and ownership interests held by a separate LLC than it is to attempt to separate the assets and paperwork of one of several businesses operated under one LLC. A business held by a separate LLC is already neatly segmented, which may make it more attractive to purchasers than a business that must first be untangled from interconnected businesses held under one LLC.
Flexibility regarding tax status. An LLC may be taxed as a corporation, a partnership, or as a disregarded entity (i.e., a single-member LLC and its sole owner are not taxed separately unless another tax election is made). Establishing multiple separate LLCs means that each LLC may be treated separately for tax purposes: for example, one LLC with multiple members could opt for the default tax classification as a partnership, whereas another LLC with the same members could elect to be taxed as a C corporation depending on which tax status is most advantageous.
Management and government structures. Each individual LLC may adopt different management and governance structures, which may be set forth in their separate LLC operating agreements.
Disadvantages of Forming Multiple LLCs
Although forming multiple LLCs could provide benefits that might appeal to a business owner, there are downsides to consider as well. Keeping each LLC legally distinct from the others requires separate bank accounts, annual reports, tax forms, filing fees, operating agreements, registered agents, financial records, employee ID numbers, and business licenses and permits. Any commingling could provide creditors with grounds to argue that the businesses are not in fact distinct legal entities, which could weaken the liability shield between them.
In addition to higher compliance burdens and costs, multiple LLCs could create conflicts of interest, especially if the companies engage in transactions with each other. When multiple LLCs with common owners contract with each other, the owners should be careful to avoid promoting the interests of one of them over the others. Doing so, especially without disclosing the potential conflict and obtaining consent from the other owners, could violate duties, such as the duty of loyalty, that LLC owners may owe to the LLC or to other owners under state law. It is important for LLC owners to be familiar with the duties they owe and the extent to which those duties may be modified or waived by explicit provisions in their operating agreements.
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Forming multiple LLCs could be advantageous for business owners who want to expand their business or investment portfolios while minimizing their risks. You should discuss whether to create one or multiple LLCs to hold your businesses or assets with a business attorney. Call us today to schedule a consultation so we can help you make the best decision for your unique situation.