Holly founded ExitPromise.com as well as StartupPromise.com and so far has answered more than 3,000 questions asked by business owners about starting, growing and selling a business.
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Entrepreneurs are known for recognizing and pursuing many opportunities in the marketplace simultaneously or in a serial fashion. In fact, such entrepreneurs may be referred to as serial entrepreneurs.
It is not unusual for a serial entrepreneur to create a multiple business entity structure to hold his or her various business endeavors. Doing so is commonplace and provides certain limitation of legal liability for the serial entrepreneur.
Such business entities may include a Limited Liability Company (LLC), C or S Corporation, and/or Partnership. Each in its own way protects the entrepreneur’s personal assets from potential risks such as lawsuits and other claims against the business. In recent years, the practice of forming layered, multiple business entities has gained increased interest among entrepreneurs desiring to start a new businesses.
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Large Businesses Form Multiple Business Entity Structures
Check out the website of your favorite fast food chain and you will see most have multiple business entity structures noted in the fine print. For a large business, this practice has been commonplace for decades. It involves layering one form of a business entity either alongside or in conjunction with an operating business. The layered, multiple entity structure strategy would look something like this:
- One entity is established to serve as the ‘operating’ business and holds very few assets on its balance sheet.
- Another related business is established to hold valuable assets such as patents, trade secrets, software, websites, and other intellectual property and serves as a ‘holding’ company.
- Likewise, real estate needed for operations may be held in a separate entity.
- In simple terms, the enterprise assets are separated from the potential liabilities in the same business enterprise by placing them in two (or more) separate business entities. Such multiple business entity layering necessitates careful drafting of legal agreements between the various entities involving items such as leases, licensing agreements, management agreements, etc.
Tax Consequences of the Multiple Business Entity Structure
While creating multiple business entities may afford the entrepreneur an opportunity to separate liability exposure in his business from his personal assets and the assets of his other business endeavors, certain tax consequences can and will follow.
LLC’s, Partnerships and S Corporations offer pass-through taxation treatment.
The C Corporation is taxed at the entity level as well as the personal level when dividends are paid to the individual shareholders.
All tax consequences should be considered carefully when choosing the form of business entity, regardless of the number of entities formed by the entrepreneur. Layering multiple entity structures may include one of the following entity combinations:
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- An LLC owning multiple LLC’s
- Limited Partnership owned by a General Partner (another entity) and Limited Partner(s)
- Individual S Corporation owned by a Single Member LLC
- S Corporation owned by a Limited Partnership (with all individual partners)
- S Corporation owned by an S Corporation with one individual shareholder
- C Corporation owned by another C Corporation, Trust or LLC
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It’s worth noting that each business entity has its own tax consequences at the federal and state level. When considering the entity structure, whether forming multiple entities operating in tandem or layered multiple entities, it is wise to consult with both legal counsel and a tax advisor familiar with the appropriate state’s corporate and tax laws. Furthermore, care should be given to the decisions related to how assets should be titled and recorded on the multiple business’s accounting records. Asset titling or ownership issues will be important when one or more of the businesses is ultimately sold.
Hello!
My husband and I started an LLC (partnership) as a holding company. The primary purpose will be real estate: long-term rentals. We opened another LLC (100% owned by the holding LLC) in the state where the rental is. Should this subsidiary LLC be classified as a disregarded entity or something else?
Our long-term goal is to buy multiple rentals with an LLC in each state we purchase in (or possibly an LLC for each property).
Is this the correct approach or is another approach better?
Hi Ashley,
The LLC (let’s call it REAL ESTATE LLC) that’s owned by the holding company LLC is a disregarded entity unless you choose to treat it as a corporation for tax purposes.
If it’s a disregarded entity, the holding company will report the REAL ESTATE LLC’s income/expenses on its tax return each year. I know you didn’t ask — but many people don’t understand this important point! đŸ™‚
The correct approach depends on what you want to achieve. As it is described now, you’ve simplified your tax reporting. You should keep separate accounting records (P&L and Balance Sheet).
If you are trying to create liability protection (think lawsuits) for each rental property, then each rental property should have its own LLC. If so, you’d still report all of the income and expenses on the holding company LLC’s tax return — and keep separate P&L and Balance Sheets for each LLC/rental property.
I hope this is helpful!
All the best…
Hello,
How would I structure multiple business partnerships (minority stakes) and 1 business which is a single-member LLC (100% owned by me) taxed as an s-corp, under 1 umbrella entity?
I have read that a holding company may be appropriate, but I was also told that I would have to have a majority stake in the partnerships.
What is the best business structure to manage these entities and potential future business endeavors?
Hi Ed,
Your research is correct. To form a holding company, the underlying businesses would need to be owned by you (majority).
The best business structure to manage your multiple business entities depends on many factors. The first is knowing what your objective is for each of the business entities.
Unfortunately, there is no single, or one-size fits all solution.
All the best…
What is the best structure to setup a stock trading company? I currently have an LLC 90% myself and 10% my C Corp as partners within the LLC (stock trading co). I am 100% shareholder of the C Corp. I was informed there were tax deduction benefits that can be used from the C Corp hence setting up a combination between the two companies. Is this viable? Or is there a better setup to ease my tax burden?
Hi M.J.,
There are hundreds of ways to set up a business if you want to use a combination of business entities for your new business.
Choosing which is best for you depends on your goals and personal situation so it’s not possible to provide you with an answer. I am sorry.
I suggest starting with your goals and then discuss it with an advisor who understands the legal and tax aspects of the various business structures.
For a business that provides rental properties to residential clients, looking for the best structure and goaled with avoiding passive taxation to business owners, and also ensure proper asset protection. Thinking about setting up a INC (C Corp) as Holding Company and have many LLCs as the operating companies. Does this multi-entity structure accomplish these goals?
Scott:
The main purposes of an entity is to provide you with both legal and tax protections. Without knowing more about your business, this particular organizational structure you propose probably sounds good for legal protection, but would be disastrous for tax costs. Just one example: If you are purchase real estate in a corporate entity, you will get to pay double the tax and not get the benefit of reduced long-term capital gains taxation.
Please consult both a tax advisor and an attorney because this is a type of situation where tax and legal protection may be in conflict to some degree.
Our firm specializes in working with real estate investors, so if you don’t have an advisor that knows real estate tax strategies, feel free to contact me.