Is it possible to merge several companies within one legal entity? It depends on the peculiarities of corporate law in different countries of the world.
- In some states it is excluded and illegal.
- In other countries, entrepreneurs have to understand the legislative nuances so that the tax service does not suspect the company of splitting the business for the sake of obtaining an unjustified tax benefit.
- And there are jurisdictions where you can legally structure a business at the discretion of the owners, such as the US – the information in this article applies specifically to the States. If you want to run two or more businesses under one legal entity in other jurisdictions, consult with experts.
Let’s consider how to legally conduct several types of business by combining different areas under the umbrella of one limited liability company – LLC (limited liability company). LLC is the most common legal form for conducting commercial activities in the States, an analogue of the domestic LLC. The popularity of LLC is due to the fact that the founders of the business unit do not bear full financial responsibility for the company’s debt obligations. In particular, the owners’ personal capitals are protected from recovery as a result of lawsuits against the legal entity. Most importantly, an LLC can be established for a wide variety of business purposes, which means that the owner has the right to provide any authorized business services on behalf of the LLC.
American entrepreneurs have the right to register any number of companies in their own name. The main thing is to organize this structure competently in order to manage the business more efficiently and optimize current processes.
How can an LLC be legally structured
1. doing business under an alternate name, or DBA
A DBA (doing business as) is a separate name for a business to engage in other lines of business that are unrelated to the main “parent” company. It is by no means a separate LLC, although a DBA must also be registered with the Secretary of State – the same office where the LLC was originally registered, only it is a faster, easier and cheaper process.
What is the point of registering a DBA? The main purpose is to diversify revenue, as well as marketing and branding to segment customers and create the right associations with the business for consumers. Here’s how it works with an example. The founder of a coffee shop called Fresh Coffee LLC decided to open a side business, such as a flower store. Selling flowers has nothing to do with making coffee, and it would be strange and confusing to consumers if the flower store operated under the Fresh Coffee LLC sign. Therefore, the owner registers the new business selling flowers as a separate DBA under the name, for example, “Flawwa” and that trade name is legally owned by “Fresh Coffee LLC.” Running a second business under a pseudonym cannot be called scaling the main company, it is a diversification of operations where the owner creates an additional source of income for himself.
Advantages of creating a DBA:
- A new business under a pseudonym is much easier to register than a separate LLC.
- Lower operating costs (all umbrella businesses operate under one charter, common reporting).
- Simplified tax reporting (income for all DBAs is summarized and declared together with the main LLC).
- There is no need to open a separate bank account for each DBA, it is enough to notify bank employees that money to the existing account will also be received from other channels. Only the name of the recipient will change in the payment details.
Disadvantages of DBA:
- An umbrella business is formally one legal entity, which means the responsibility is also one for all. If one of the structures has problems, the risks will be common.
- The assets of all umbrella businesses are also considered common, only the personal assets of the owners are protected. If one of the structures cannot answer for its obligations, e.g. debts, the assets of all others are at risk.
- DBA status requires regular confirmation (about every year or several years, depending on the state), reissuance of documents and payment of fees.
- An inexperienced entrepreneur can get confused in maintaining reports from different structures, as a result of which errors in the organization of company activities can occur.
- Umbrella businesses are not designed to scale. If over time one of the DBA structures begins to grow and develop, it is better to register that company as a separate LLC to protect assets.
As you can see, opening an additional business line within an existing company is a perfectly legal way to go. Of course, this approach has some disadvantages, but there are also advantages, so this option has its place.
2. Registration of separate LLCs
The Multiple LLC (or serial LLC) business structuring methodology is the opposite of the previous method. The essence is that for each line of business a separate legal entity is registered with all the ensuing consequences: separate accounting, reporting, tax declaration, staff and managers, legal and physical address, autonomous management, bank account, etc….
Advantages of creating serial LLCs:
- Each legal entity is solely responsible for its own obligations, so problems in one business have no effect on the other companies.
- The business can be split in any way the owners see fit, and a new LLC can be created not only for individual lines of business, but even for each product line or new service. For example, a bakery baking bread is one legal entity, but a separate LLC can be created to deliver that bread. This approach protects the assets of the business even better.
- Complete order in financial and tax reporting, because the documentation of different LLCs does not overlap in any way.
Disadvantages of separate LLCs:
- Requires more resources to service multiple business units. Each LLC must be separately registered, obtain a license to operate, and pay taxes separately. As a result, it is more expensive and labor intensive to service a large business structure.
3. holding corporation
The essence of this business combination is that any LLC can become the founder and sole owner of another LLC. In such a case, the primary LLC will act as the parent or holding corporation, and the newly formed companies will act as subsidiaries or operating companies. Typically, the holding corporation does not conduct any business activities or produce any goods and services, but only manages the operations of the subsidiaries.
Advantages of a holding structure:
- Each subsidiary LLC operates separately from the other “subsidiaries,” which protects it from unnecessary liability.
- Ability to rationally manage cash flow. Each subsidiary company transfers its income to the account of the parent corporation, and this is an opportunity to redistribute funds if one of the enterprises has temporary financial difficulties.
- The ability to fully protect valuable business assets. All assets can be titled in the name of the parent corporation, and the operating companies will lease those assets. If one of the subsidiaries is unable to cope with creditor claims or tax liabilities, such a legal entity can be liquidated without much loss.
Disadvantages of a holding corporation:
- It is the most difficult structure to manage with a very complex tax system.
- It requires an impressive amount of start-up capital to organize a holding corporation.
Bottom line, there are three possibilities in the States to combine multiple businesses under one legal entity. If you want to know which structure is right for your company, consult with licensed professionals.