When someone is managing multiple businesses under one “umbrella” limited liability company, a question that commonly arises is when, if ever, is the appropriate time to divide those businesses into multiple LLCs? Let’s take a look at the common benefits, and potential pitfalls, associated with splitting a multi-business LLC into multiple LLCs.
One of the biggest benefits associated with dividing an LLC used as an umbrella to multiple businesses is that it helps further limit your liability. Obviously, an LLC is already a limited liability company; but establishing a separate, independent LLC for each new business further divides and mitigates the risk associated with any possible liability among the companies. As a result, if you are looking to “silo” the legal and financial risks for each of your businesses, then creating multiple LLCs makes sense.
Another benefit to creating multiple LLCs is that it will be much easier to sell one single LLC, or wind down an LLC. In contrast, when you are attempting to manage several businesses under an umbrella LLC, it is much more difficult to divide and categorize the relevant paperwork, assets, and so forth. Basically, creating multiple LLCs will require significant administrative work at the beginning, but once they are set up, you are likely to save yourself significant administrative work on the backend.
There are potential pitfalls to consider when assessing whether it makes sense to move forward with creating multiple LLCs. One of the potential pitfalls is related to navigating the complexities of various state laws for each business. For example, you will need to formally register with the state, secure an EIN, designate a registered agent, and so forth just to get each and every LLC off the ground and maintain the existence of each LLC. In addition, taxes will need to be filed for each LLC you create since they will now be viewed as their own, independent business entity.
A Holding Company
Another option to consider is forming a holding company for additional legal protection. In most instances, a holding company does not manufacture any products, sell products or services, or conduct business operations. Instead, holding companies simply hold equity in other companies. Holding companies, when structured properly, are generally protected from any financial losses that are accrued by their subsidiaries. As a result, if one of the subsidiaries were to go bankrupt, or is sued for debts, then the creditors for that subsidiary are generally prohibited from pursuing any of the equity owned by the holding company.
Are You Considering Dividing Your Business into Multiple LLC’s? Contact Hakim Law Group Today
The decision to divide your business by splitting it up into multiple entities is extremely important and will have far-reaching ramifications on the operations of your business. The seriousness of this decision, the impact associated with it, is why it is in your best interest to consult with a reputable business lawyers in Los Angeles such as the professionals at Hakim Law Group.
Our law firm represents an array of entrepreneurs, operating companies, venture capital firms, and financiers in various sectors of the economy. Our extensive experience enables our firm to handle a broad range of legal matters in the business world, including business formation, technology transactions, lending, employment and so forth. For further information or to schedule a consultation please contact HLG at 310.993.2203 or visit https://www.hakimlawgroup.com/ to learn more.