Legal business designations can be difficult to navigate and if you are operating more than one business, or are hoping to, you may be wondering if you can run your two businesses under one LLC.Well, there is good news! Yes, you can have two businesses under one LLC! But, determining if this is a wise decision for your businesses may not be so cut and dry. Is it better to have multiple LLCs? Will multiple LLCs complicate your tax filings?To better answer your questions, we’ll walk you through some of the ins and outs of LLCs so you can decide what will work best for you and your various businesses.
Why You Should Have an LLC
A limited liability company, or LLC, is a business structure that offers liability protections to investors, owners, and stakeholders that have financially contributed to the business. If you plan to secure external funding, it is a good idea to register as an LLC. Instead of operating as a sole proprietorship or partnership, operating as an LLC will protect the personal assets of investors and eliminate their liability should the company owe a debt. Beyond making your company or business more appealing to investors, an LLC can help you at tax time. Instead of paying federal taxes for the business, the profits and losses of the business can be listed on the personal tax returns of the owners or filed as an S Corporation to build credibility as a business.
Pros and Cons of Multiple Businesses Under a Single LLC
There are a number of pros and cons associated with operating multiple businesses under a single LLC.
- It is easy to test business models, products, and services
- Lower costs and less paperwork (one Articles of Organization and one annual LLC report)
- It is easier when getting started
- Complicated accounting as the financials for each company are not separated
- The liability risk is higher as the liability for each company falls under the same umbrella.
For business owners that are inexperienced at running one or more businesses, or for individuals who do not have a lot of money, registering two businesses under the same LLC makes sense. Combining two companies into one LLC allows business owners to test multiple business strategies and models without assuming an extremely high level of risk. But, more often than not, more experienced business owners will separate their companies into separate LLCs. This allows them to keep finances separate and better track profits, losses, and business expenses.
Is It Better to Have Two LLCs?
Choosing to have two LLCs instead of one can minimize your liability exposure. However, whether or not this is your best option depends, of course, on your situation. Some people choose to have a single LLC and register their separate businesses as DBAs, or “Doing Business As.” In this instance, two businesses would be operating under different names but the same LLC. Since a DBA is a smart option for running a business, then why would people even bother to register for another LLC? Again, the answer comes down to liability exposure. By creating multiple LLCs, you are better able to protect the assets within each company. Should one business run into financial trouble, the assets associated with a secondary business (housed under the same LLC) could be at risk. If one business is sued, for example, the other business may go under as a result. With separate LLCs, this would not be the case. The assets would be protected under each limited liability agreement.
Operating Multiple LLCs
While registering more than one LLC means more paperwork, you shouldn’t let that stand in your way if it is what makes the most sense for your operations. Hiring a registered agent can eliminate the pressure on you and ensure that all required documentation is properly filled out and filed. For accounting purposes, you’ll want to set up an accounting system for each LLC. You can do this by establishing separate business bank accounts for each LLC. Taking this step will clarify income and losses and simplify the process of issuing and filing the proper tax forms. With each bank account, you’ll want to keep the books and records separate. By doing this, you should be able to avoid any major complications. Be aware that operating multiple LLCs makes things a little bit different at tax time. Many reasons why business owners go with an LLC business entity type is the tax benefits. Even if operating multiple LLCs, incomes and losses can still be reported on the private tax return of each member. For example, in most cases, the income and losses for an LLC will be reported on the owner’s personal tax returns. Single-member LLCs are taxed like sole proprietorships with income and losses reported on Schedule C and the standard Form 1040. Multi-member LLCs are taxed like partnerships with members paying taxes only on their share. Multi-member LLCs are required to file a Form 1065 so the IRS can determine whether or not each member is reporting correctly. This type of LLC must also provide a Schedule K-1 to each member which will break down each member’s share so they can properly report income and losses on their Form 1040 with an attached Schedule E. The process is similar with multiple LLCs. The steps mentioned above remain the same and must be carried out for each LLC. Note that having more LLCs does not mean that you can reap a higher tax break. Multiple LLCs will not raise or decrease the rate of taxation. Other things to consider is how management and daily operations will be handled in each LLC, whether or not each LLC will have a separate business website, business phone number, business address, brand, and whether each business will have to follow specific compliance and privacy laws unique to its region or industry.
Should You Have Two Businesses Under One LLC?
While we cannot determine which path is the right one for you, it is clear that holding multiple LLCs can clarify your books and help protect your businesses from liability claims made against one of your businesses. If you are creating multiple LLCs in multiple businesses or industries, consider outsourcing the registration and filing of legal paperwork with a service like Northwest Registered Agent. By using a formation service, you can streamline this process and make things a lot simpler. If you have yet to set up an LLC and are looking for more details, check out our guide How do I Start an LLC? or review our step by step business set up guide.