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If I own more than one business should I put each business into its own LLC?

Many entrepreneurs own multiple businesses. For example, an entrepreneur might own a principle business where she or he makes most of their money. Perhaps this principle business does consulting, for example. But then, commonly, the entrepreneur may own another business or two. A carwash business. Or a personal service business like a tanning salon.

Obviously I’m just making these example businesses up. But you get the idea. Many times, an entrepreneur will own multiple businesses.

And that fact–owning multiple businesses–raises an interesting question. In a situation where an entrepreneur does own more that one business, should the entrepreneur use a single limited liability company or multiple limited liability companies. I would say that prudence probably dictates that the entrepreneur place each business into its own limited liability company.

By putting the consulting business into one limited liability company, the carwash (say) into another limited liability company, and the tanning salon (say) into still another limited liability company, the entrepreneur protects the individual businesses from each others’ risks.

In a worst-case scenario, of course, a limited liability company might need to be liquidated and shut down if someone sues the limited liability company. That worst-case scenario means that everything and anything that that limited liability company owns might be lost. But if, to continue our example, the entrepreneur loses his tanning salon business but then keeps his carwash and consulting businesses safe, that’s a much better outcome.

Without holding each business interest in a separate LLC, in a worst-case scenario the entrepreneur may lose all three of his businesses if something bad happens to any one of the businesses.

Let me also add a related comment about this idea of using multiple limited liability companies for your entrepreneurship. One common wrinkle that entrepreneurs use if they separate businesses into individual LLCs is a tiered structure. In a tiered structure, an entrepreneur might set up a parent, or holding, limited liability company. The parent limited liability company would then own the individual “child” limited liability companies. These “child” limited liability companies conduct the actual business operations.

For example, an entrepreneur that owned a consulting business, a carwash and tanning salon might create three “child” LLCs for the consulting, carwash and tanning salon businesses. Then, that entrepreneur might set up a parent limited liability company and transfer the ownership of the three “children” to the parent.

One advantage of using a parent-child tiered structure would be that when the time came, the entrepreneur could easily turn the parent LLC and all of the children LLCs into an S corporation or C corporation. For tax accounting purposes, in this case, the children LLCs would be disregarded (which simply means the children’s income and deductions get reported on the parent’s tax return).

As another advantage of the tiered structure would occur if the parent LLC was owned by more than one person. In this case, the parent LLC would be treated as a partnership for the tax accounting purposes but again the child LLCs would be disregarded. This approach, too, will simplify accounting for the business because with the tiered parent-child structure, only one partnership return will be required–and not three partnership returns.

And there’s a third advantage of a tiered structure, too: In a tiered parent-child structure, the entrepreneur might with a bit of clever setup and help from the accountant be able to maintain only one accounting system and a single set of financial records. In the case where the business owner uses the QuickBooks accounting system, for example, the business might be able to comfortably use one copy of the QuickBooks accounting software and a single QuickBooks data file.

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