Have you ever wondered if it’s a good idea to start more than one LLC? Well, you’re not alone. Many business owners consider setting up multiple limited liability companies, and there are plenty of reasons why. It’s like having different baskets for your eggs – it can keep them safe. But forming LLCs is not the best move for every business. There are costs, paperwork, and other details to think about.
In this article, we’ll walk you through the ins and outs of forming and owning multiple LLCs. From the perks of protecting your assets to the nitty-gritty of annual fees and paperwork.
Why Own Multiple LLCs? Top Advantages
Owning multiple LLCs is more common than most business owners might think. If you’ve ever heard an entrepreneur say that they have a “holding company” structure, it likely means that they have multiple LLCs.
Business owners can achieve additional liability protection for their personal assets with multiple LLCs. Moreover, you can put a similar protective barrier between two businesses with separate LLCs.
The riskier a business is, the more it can benefit from forming multiple LLCs. For example, real estate companies will typically form separate LLCs for each individual property in their portfolio.
By forming separate LLCs, each property can have its own financing without impacting any of the other properties. Creditors of one property cannot go after other properties owned by separate LLCs to satisfy a judgment.
Disadvantages of Owning Multiple LLCs
Forming multiple LLCs is not the best decision for every business. Here are some things you should consider before deciding to form multiple LLCs:
- Paying Multiple Formation Fees
Owning multiple LLCs requires paying the necessary state filing fees to form each company. Business owners will need to consider costs when deciding whether to open multiple LLCs. Filing fees are different in each state.
- More Paperwork
Every LLC will need its own EIN number, Operating Agreement, business licenses, and other documents. Additionally, each company will need to have organized records.
- More Annual Costs
Most states require LLCs to pay some kind of annual fee in order to keep their good standing status. In Delaware, the Annual Franchise Tax for LLCs is $300. Business owners will need to multiply any annual fees by the number of LLCs they open.
Steps for How to Own Multiple LLCs
Owning multiple LLCs requires going through the LLC formation process for each company. Here are the steps you need to follow:
Step 1.) Appoint a Registered Agent
A registered agent is a person or company that has a physical address in the state where the company is being formed. The registered agent represents an LLC in its state of formation and receives important legal documents, called “service of process”, and tax notices on behalf of the company.
You will need to hire a registered agent service for each one of your LLCs if:
a.) You do not have a physical address (not a P.O. box) in the state where you’re forming the LLCs, or
b.) You cannot be available at your address between 9:00 am and 4:00 pm on Monday through Friday to accept potential notices.
Hiring a registered agent can be helpful when forming multiple LLCs. A registered agent, like IncNow, can help you manage important documents and notices by keeping records for each company.
Step 2.) File Certificates of Formation for each LLC
The Certificate of Formation, also called Articles of Organization in some states, is the official document that gets submitted to the Secretary of State’s office to register an LLC. A Certificate of Formation needs to be filed for every LLC.
The information required on a Certificate of Formation is different in each state. In Delaware, the LLC Certificate of Information only requires:
- The company name,
- The name and address of the registered agent, and
- The signature of the organizer.
You will need to pay the necessary filing fees for each Certificate of Formation that you submit. Filing fees are different in each state, so this is something to consider when deciding whether forming multiple LLCs fits into your business plan.
Step 3.) Prepare and Sign Written LLC Operating Agreements
The LLC Operating Agreement is the internal company document that details how an LLC is structured. The Operating Agreement outlines each member’s ownership percentage and their responsibilities in the company.
Each LLC should have its own Operating Agreement that is signed by all of the company’s members. Having a well prepared, written Operating Agreement is important for preventing disputes between business partners. In addition, the Operating Agreement is an important part of maintaining each LLC’s limited liability shield.
Step 4.) Obtain Employer Identification Numbers (EIN) from the IRS
Each LLC needs to have its own EIN number. The EIN number is the type of federal tax ID number that the IRS gives to business entities.
An LLC needs an EIN number in order to open business bank accounts, hire employees in the U.S., and obtain business licenses. A registered agent, like IncNow, can assist you submit the EIN Application Form SS4 to the IRS.
Step 5.) Open LLC Bank Accounts
An important part of owning multiple LLCs is keeping each company’s finances separate. Each LLC needs to have its own bank account in order to protect business assets between companies. LLC bank accounts also help protect members’ personal assets from business liabilities.
Step 6.) Keep Up with Annual Requirements
Most states require LLCs to complete some annual requirements in order to stay compliant with state laws. Annual requirements for LLCs may include filing an annual report, or paying some kind of maintenance fee.
Delaware LLCs do not have to meet any annual requirements, other than paying the Delaware Annual Franchise Tax. The Annual Franchise Tax for Delaware LLCs is a flat fee of $300. An LLC owes franchise tax for each year that the company is active.
How Do You File Taxes for Multiple LLCs?
The IRS treats LLCs as “pass-through” entities by default. This means that the company passes business income through to its owners, who report this income on their personal tax returns.
Single-member LLCs (LLCs with just one member) start out being taxed as sole proprietorships, while multi-member LLCs are taxed as partnerships. LLCs owners can choose to have the company be treated as a C-Corporation (C-Corp) or an S-Corporation (S-Corp) depending on which structure provides the biggest advantage to the business.
How Does LLC Ownership Work with Multiple LLCs?
LLCs are owned by members who have an ownership interest and specific rights within the company. The LLC members establish the company’s ownership structure by preparing a written Operating Agreement. The Operating Agreement is essentially a contract between the LLC owners that sets out what their ownership and rights are in the company.
The LLC Operating Agreement is the internal document that details how the company should operate. In Delaware, a popular state for forming LLCs, business owners have the freedom to structure their company however they want, as long as each member can agree to the terms of the Operating Agreement. The LLC Operating Agreement should cover:
- Each member’s ownership interest, voting rights and responsibilities,
- The shares in profits and losses of each member, and
- How distributions should be made from the company
What are Holding Companies, and How are They Used?
The term “holding company” typically refers to a business entity, often an LLC, that’s sole purpose is to own other business entities. Savvy entrepreneurs and large corporations use holding companies to separate lines of business and reduce liability risk.
A holding company you might know of is Alphabet, Inc., also known as “Google”. Google uses a holding company, as well as subsidiary companies, to keep its many products and business lines legally separate from one another.
The Google search engine, YouTube, and other products and services are managed under separate business entities, of which the holding company is the majority owner. This allows Google to develop different products and services without exposing liability on other parts of the business to liabilities.
Do I Need a New LLC to Start a New Business?
Starting a new business does not always require forming a new LLC. However, forming new LLCs for separate businesses is the only way to achieve limited liability protection between each business.
You can start new product lines and services under just one LLC by using a DBA. DBAs allow you to market and sell products or services under a different name. However, DBAs do not provide any additional liability protection for yourself or your business. Any lines of business that you operate under one LLC could be negatively impacted by the liabilities associated with other products or services.