Multiple Business Entities or One Umbrella Business Entity?

[vangogh]

In the last few months I've started branching out and started to set up new sites based around different business ideas.

Does anyone know the pros and cons of having each site and business be its own business entity or having one umbrella business that all the other businesses fall under?

I'm inclined to think having one business entity is best and then having each of the businesses be a part of the overall business, but I'm wondering what the advantages and disadvantages to each setup would be if there are any.

Thanks.

[KristineS]

The company for which I work has done both. We have had entirely separate businesses, which weren't even supposed to be associated with each other in any way. The problem with that sort of set up is that if a business doesn't do as well or needs to be dissolved, it's more difficult to do.

For this round of businesses, an umbrella company was created and each separate company is a subsidiary. From what I understand that's easier for tax purposes and legal purposes, but I don't know all the ins and outs of how that's so.

[vangogh]

Thanks. That makes sense. I hadn't really considered the idea of dissolving one of the businesses so that's good to think about. The umbrella/subsidiary set up is the one I think is probably best, but my knowledge on this is somewhat limited so I thought I'd ask for opinions.

[Evan]

It depends on the risk you expect each business to have. For simplicity, it's probably best to just keep one company with fictitious business names attached to it.

So ABC Corporation is doing business as "StevesList" and "Ice Cream Enthusiasts" or whatever business you create.

This would be much better than setting up ABC Corporation, being a parent company of StevesList, LLC and Ice Cream Enthusiasts, Inc.

[vangogh]

So in the end there really wouldn't need to be a lot of paperwork in this scenario and the organization exists mostly internally on my end? Or would I need to fill out paperwork to the effect of "doing business as...?"

[KristineS]

I think there is some sort of paperwork for a DBA, but I'm not entirely sure.

Here's some info on DBAs: Doing Business As Info (http://entrepreneurs.about.com/od/businessstructure/a/doingbusinessas.htm)

[Evan]

So in the end there really wouldn't need to be a lot of paperwork in this scenario and the organization exists mostly internally on my end? Or would I need to fill out paperwork to the effect of "doing business as...?"

The state would have the paperwork. It's similar to a DBA, but is often called a "ficticious business name". But in essence you'd be writing ABC Corporation dba Other Business.

[vangogh]

Good to know. Thanks. I'll have to look into it, but I assume it's all done through the same place where I registered my trade name. I found everything previously on the department of state site for Colorado and imagine I'll find this there as well.

[Business Attorney]

Steve, I think the answer to your question really depends on what you are trying to do with the separation of the lines of business. If it is purely for marketing purposes, and perhaps some internal accounting to keep track of profitability by line of business, then using one entity with separate business names should be fine.

If there is any concern for limiting liability (which is often difficult to do from a practical standpoint in a one-person business, no matter what form it takes), then you may want to consider multiple entities. If they are all single member LLCs (or a single member Series LLC if that is allowed in your state), then the "paperwork" is pretty minimal. You'll need to form each entity and then once each year file an annual report which in most states is little more that signing a single sheet of paper. There is an annual fee, which in most states is less than $100. A few states like California and my state of Illinois make it more expensive and therefore less attractive, but no more complicated.

In most states, even the fictitious name filing requires some fee (usually less than forming an LLC) and requires that the filing be periodically renewed, so there is still some cost and some paperwork either way.

For our real estate clients, we almost always recommend putting each property in a separate LLC (or separate cell in a Series LLC) because even with insurance there is a risk of a catastrophic claim against the owner. Ditto if the business consists of three or four restaurants. But if your business consists of, say, a web design business, a marketing consulting business and an online affiliate marketing business, I see less of a reason to use separate entities.

[vangogh]

I guess my situation is that I have a trade name registered with the state and beyond that I file as a sole proprietor. What I'm planning is to develop more sites beyond my main one. So I'll have say a half dozen sites that aren't really related to each other outside of me running them and ultimately the revenue from each coming to me.

Do all those other sites need to be considered a business entity? Do I just run everything under my trade name? Do I list my main business as the registrant for each domain? Can I register all the domains under my name as an individual?

All the businesses (if they really are separate businesses) are online sites. My main site sells services and hopefully soon one or more digital products. Other sites might have affiliate marketing as a business model. Sites might also sell informational content through a subscription based membership. At some point I'm thinking I may buy and sell websites, so for a time each website I buy will be part of my business until I sell them.

I think those would be all the basic business models. None should have physical products or locations.

What I'm really wondering is how do I deal with all those websites for accounting and tax purposes (or anything else I may not have considered). I'm not sure liability is going to be a main consideration, though I suppose if I start making enough money with some or all I'd lean toward forming some kind of corporation. Am I fine still being a sole proprietor of the business for my trade name? Or do I need to different set up?

[Business Attorney]

On the whole, I don't see much advantage to setting up different entities for each website. The primary advantages of an LLC, for example, are pass-through taxation and limited liability.

As a sole proprietor, you already have only one level of tax, so there is no advantage over an LLC on that count. As to limited liability, there may be some protection but since there seems to be a relatively small risk of liability in most cases, the advantages of an LLC may not outweigh the cost and hassle.

There are certainly some types of websites where there are substantial risks. Those would benefit from the protection of an LLC or corporation. Such sites might include sites that face legal and regulatory scrutiny (such as offshore gaming or adult sites), sites that may be viewed as encouraging or at least enabling violations of copyrights or other rights (such as social networks and PTP sites), sites that may be reasonably expected to generate an occasional lawsuit (such as hosting violent games or sites that recommend unproven natural or homeopathic treatments for curable diseases that results in a death), etc... However, most sites seemingly pose little risk of such claims. It is difficult to see how a site on gardening, web site design, or reviews of web hosting companies would trigger a lawsuit or other liability.

A third reason that some people prefer to use an entity is that it provides at least a limited privacy screen. Rather than plastering your own name all over the place, you substitute the name of an entity. While people can check who is behind the entity in most states, some states now charges for that information, making it unlikely that someone will check just because of idle curiosity. A trade name may serve a similar purpose, however, at less cost and with less paperwork.

Also on the privacy front, some people prefer not to give out their social security number. As a sole proprietor, your social security number is your tax ID and must be furnished to payors. An entity would have its own tax ID, avoiding the need to supply your SSN.

[vangogh]

Thanks David. It sounds like I really don't need to make things too complicated and just keep myself as sole proprietor like I have been.

I actually do have a Tax ID. I don't need it for anything at the moment, but I got it specifically so I could use it instead of my SS# where applicable.

[Evan]

I actually do have a Tax ID. I don't need it for anything at the moment, but I got it specifically so I could use it instead of my SS# where applicable.

Which was my only disagreement with David's very detailed statement.

A seperate Tax ID # can be obtained from the IRS as a sole proprietorship by filing SS-4. You could even complete it online and print it out in a matter of 5 minutes. This certainly offers some security against identity theft.

If you form a single-member LLC from your S/P, and continue to be taxed as a S/P, you can continue to use the same EIN. If you add other members (partnership), or choose to be taxed as a corporation (S-Corp or C-Corp), you'll need to apply for a new EIN.

[vangogh]

I actually got my Tax ID with a 5 minute phone call. It was very easy and painless and does help protect my SS# in some instances.

[Evan]

with a 5 minute phone call.

To the IRS!? :eek:

Lucky.

[vangogh]

Shocking, right?

[Evan]

I've never been able to have a 5 minute phone call with the IRS. I usually wait at least 10-20 minutes.

I must be calling the wrong number.

[vangogh]

I think I was just lucky. I was definitely expecting a much longer phone call. For whatever reason I got through right away and before I knew it I had a tax ID.