Diversify, But Keep It Legal
By Nina Kaufman, Esq.Here are tips to help you avoid multiple headaches from having multiple business lines.
Tough times call for creative measures. So it’s no surprise that many of the entrepreneurs I’ve encountered are taking on something new: a new line of business, a new venture, a new alliance, a new target market.
Let’s look at a fictional example of EmployExcellence LLC and its owner, Margot. Her company provides consulting and training to mid-size companies in the areas of sales and team-building. Responding to her clients’ needs, she started providing downsizing and outplacement guidance. EmployExcellence is also developing training products, manuals and resources that Margot plans to sell (both online and off). A colleague specializing in information technology suggested that their two companies develop a series of programs working specifically with the IT industry. And Margot is considering buying the building where she now leases space so she can have a regular location for the public seminars EmployExcellence wants to offer.
But here’s the $64,000 question: Should all of this activity take place under one company umbrella?
The short and obvious answer is: It depends. While keeping everything under one company can save you money on business formation, you may add accounting and other complications.
Here are a few things to consider:
- Are your multiple lines of business truly separate businesses . . . or simply multiple revenue streams of the same business? For example, EmployExcellence’s sales/team-building and downsizing/outplacement training could fit within the same company. Although in different subject areas, they are both services, provided in comparable ways, with similar expectations of risk. Same goes for the products the company creates. However, unless Margot tracks each line of business separately, she won’t be able to measure the profitability (or loss) associated with each one. This inability to assess with accuracy what’s going on in her company could hamper her business growth.
- Will you need to distinguish each business line separately for reasons of liability, ownership or industry? Margot may well want to form a separate company for the purchase of the building. Real estate ownership usually carries with it a higher level of liability risk than consulting services; the higher risk could easily jeopardize the company’s other endeavors. There’s a difference in ownership structure, too. Whereas Margot owns EmployExcellence alone, she would own the building with an investor. Whether Margot needs or wants to create a separate entity with the IT colleague will depend on her plans for the alliance, as well as who has stronger contacts with the target client base and whether financing will be required.
- What are the costs/tax ramifications of forming a separate entity for each business line? Unquestionably, it’s cheaper not to create a separate company for each line of business. If Margot lumped them all into the same company, she could differentiate each of the various lines of business, or divisions, with its own dba, which usually involves a relatively simple filing. Having more entities definitely means more out-of-pocket costs and more tax returns to file at the end of the year. But will the synergies of the various lines outweigh disadvantages, such as loss of focus from the original business? Who will handle all of the additional record-keeping responsibilities that go along with multiple lines of business? And will Margot be adequately protected against legal risks? To guard against liability, some entrepreneurs have favored creating separate entities, some (or all) of which might be owned by a parent (holding) company.
When multiplying your business lines, make sure you don’t multiply your headaches exponentially. Think about where this fits into your long-term plans for your company. Make a plan so that each line is properly staffed and administered. And consult with your legal and tax advisors to reach the best balance of cost vs. risk protection.
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