Why would you create more than one Limited Liability Company for your business?

There are dozens of reasons, read on.

There are dozens of reasons why you would create multiple limited liability companies for your business.

  1. A Limited Liability Company, (LLC), is easy and inexpensive to set up and operate.
  2. Each LLC protects the assets in it.
  3. Each LLC protects the assets of the other LLC’s
  4. Each LLC protects the assets of the parent LLC.
  5. Each LLC makes it harder to sue the parent and other LLC’s
  6. Like not having all of your eggs in one basket, separate LLC’s provide better protection for all of your assets.
  7. If you lose a lawsuit above your insurance limits, only the LLC that was sued is as risk not your other assets, locations or companies.
  8. Each LLC can be taxed a different way.
  9. You can take money out of each LLC a different way.
  10. Setting up different LLC’s for each state you may operate in provides more options for the LLC in that state.
  11. Setting up a different LLC for each state you operate in provides more tax advantages for the LLC in that state.
  12. Overall, you create more barriers to losing your business because of creditors.

And there are many more reasons beyond these twelve.

As an example let’s look at a small outfitter or climbing wall with the following assets:

  • Two locations (leased)
  • Equipment share by both operations
  • Equipment at each operation

You would set up the LLC’s this way probably.

Each separate business operation or real estate address should have it’s own LLC. Any equipment that is used by both LLC’s can be in a separate LLC that is rented to the business LLC’s when needed. The equipment rental company can also be used to buy all equipment and products needed by the operations to get better deals. Any management, operations, etc., are done out of the Parent LLC that owns the other three LLCs. If either businesses gets sued, the assets of the other LLC, the joint Equipment and the management assets are protected from that lawsuit.

If you operate a business that is based on permits you may want a separate LLC for each permit you own.

If you owned land under your businesses, you would want those in separate LLC’s. You can lose the business and start the next day because you still own a lot of the equipment and the land.

There are some negative issues with this type of set up.

The relationship between each LLC and the other LLC’s must be in writing with a proper agreement and proper accounting. That means there needs to be a management contract between the parent company and the different LLCs. There needs to be a rental agreement between the equipment company and the operating LLCs.

If you are an outfitter with this set up, and you transport your guests in vehicles you would want to add a transportation LLC. Your greatest liability is in moving guests to the activity location. Always keep your liabilities separate from your assets.

In this situation, you would need a lease agreement between the Operations and the Real Estate LLCs.

If you start to grow to the point that this gets unwieldy, you can consolidate and combine assets.

Your situation and growth are going to be different and will vary on how well you, and your CPA can work together. Other than increased accounting costs, you will achieve significant protection from any possible lawsuit by using multiple LLCs with little additional work.

If you have a good CPA, you can also have the LLC’s taxed differently to provide different benefits or income to you. You can take money out of some LLC’s as income, some as rent, others as an independent contractor based on how you initially set them up and how they are recognized by the IRS.

One final idea is you may have assets that are so valuable and small that you do not want to keep them in any LLC that could get sued. An example would be a federal permit or concession contract. You could keep those in your own name or in a different LLC that does nothing but leases those permits to your LLC’s. That way, no matter what, you can start again because you have a valid permit.

The final issue might be if you decided to take your company public someday. Contrary to popular belief, incorporating in Delaware is NOT the place to set up your business. Incorporating in Delaware until you have decided to go public has many negatives.

  • People think you are a bigger company, there fore they will sue for more money.
  • The cost of incorporating in Delaware is several times more expensive than most other states.
  • The yearly costs of maintain a corporation in Delaware is expensive.
  • You have to hire a statutory agent in Delaware who adds to your cost.
  • You have to follow Delaware law in running your company or corporation.
  • Your LLC or Corporation will have to follow Delaware laws so you may have to hire an additional attorney.

What if you want to go public someday? Then at that time, create a Delaware corporation. Have that corporation become the owner of all the other LLCs you have created. Now you are a Delaware corporation ready to go public and have delayed the cost of creating a Delaware corporation until you can afford it.

Save your money when you are starting out, start your LLC in the state where you are going to operate so you understand the state laws your LLC will be operating under.

What do you think? Leave a comment.

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By Recreation Law    Rec-law@recreation-law.com    James H. Moss

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