• Many business owners struggle to decide how to structure their multiple ventures.
  • Separating your different businesses correctly is essential to protect each one from the others’ liabilities and risks.
  • Series LLCs often come up in their research, but they come with a lot of drawbacks.

Should I form multiple LLCs?

Business owners may want to separate their businesses for a few reasons. Primarily, doing so creates a liability shield between them. This is especially important when one business carries significantly more risk than another, or when one other business makes more money or has more assets than another. If the businesses are properly separated, their assets and liabilities are separated from each other. This reasoning applies to any type of legal entity, such as LLCs, PLLCs, or corporations.

Having separate businesses can be important for other reasons as well. Some businesses can only operate for a specific purpose, such as therapy practices. Some businesses may want to remain separate for ethical or appearance reasons. And finally, it may be beneficial to keep businesses separate if you want to eventually sell one business but not the other, or if you have different ownership structures for each business.

What is the downside to having separate entities for each business?

Maintaining separate businesses incurs a high administrative burden. Many of our clients who had separate businesses ended up merging them together; eliminating that extra administrative work outweighed their reason for the separation. We explain the administrative processes that separation requires below.

How to separate businesses into separate LLCs

After the LLC formation process, any transactions between the businesses should be at “arm’s length”, meaning transactions where each business acts in its own self-interest. This is the main rule to maintain the liability shield. The companies should not share any assets or work together without a commercially reasonable contract or similar agreement.

If you do not take these steps to keep your business entities separate, a court or government agency may decide that the businesses are essentially one business. This would allow creditors or other parties with claims against one business to collect assets from both businesses. In other words, they could “pierce the corporate veil”. Piercing the corporate veil removes the liability shield that usually motivates the creation of separate business entities. Hence, careful adherence to administrative best practices is almost as important as forming separate entities (such as LLC, PLLC, or corporation) if you want to maintain the liability protections between businesses.

Practically, how to manage separate LLCs

Here are specific examples, tips, and tricks to help you protect the liability shield between multiple entities and avoid issues that could pierce the corporate veil.

Formation

You will need to follow the formalities for forming a business for each separate company. This will require:

  • Setting up the entities (some combination of multiple LLCs, PLLCs, or corporations) with the state.
  • Filing separate annual reports for each company with the state every year.
  • Keeping separate minute books for each company.

Finances

The businesses should have:

  • Separate bank accounts
  • Separate books of accounts
  • Separate tax numbers (typically, but you should confirm with an accountant/tax attorney)

Make sure you do not:

  • Pass through money from one business to the other business. For example, you shouldn’t get a deposit in one business’s bank account and then the next day transfer that same amount of money to the other business. The more you do this, the worse it looks when it comes to piercing the corporate veil.
  • Deliberately underfund one of the businesses (or both). You should make sure, to the extent possible, that each business has enough funds to operate. Courts may consider it fraudulent to intentionally underfund a business to avoid liability.

Transactions

Each transaction will need arm’s-length contracts between the two businesses, such as:

  • Doing business together – is one business a customer of the other? There should be a client contract.
  • An agreement for hiring each other’s employees or independent contractors.
  • Separate agreements for vendors and clients.
  • If using the same space, leases or sublease agreements.
  • Loan agreements or other agreements for exchanging funds.

Is a Series LLC a good idea?

While you can form a Series LLC in Illinois, we tend not to recommend them anymore, for multiple reasons. Series LLCs have less flexibility, especially if the different series have different ownership structures. You’ll no longer significantly save on annual fees, since the Secretary of State decreased LLC filing fees quite significantly a while back. Also, the liability protection between series isn’t as certain as it is with completely separate LLCs.

To us, it makes more sense to form a separate LLC for each business, with or without a holding company.

Why choose a DBA over another LLC?

A DBA (“Doing Business As”) allows a business to operate under a different name than the one originally registered with the state. In Illinois, DBAs are officially called “Assumed Names”.  Often used for marketing purposes, a DBA or assumed name acts as a secondary name (or third, fourth, etc.) for the company and saves the owners the hassle of forming a new entity. When launching a new product or service, for example, adopting a specific DBA can help establish another brand for your business. They’re also called “fictitious names.”

DBAs and assumed names do come with downsides. You won’t get the liability protection afforded by a separate LLC, PLLC, or corporation. On the flip side, though, they allow you to establish a new brand under your business entity without the administrative load involved with a completely separate business entity.

Argh, so what should I do?!

We get it, these decisions are tough. One of the biggest mistakes that new business owners make is to put off forming an entity for their business, like an LLC, because there is just so much more to know. Getting some liability protection ASAP is infinitely better than procrastination!

You can always add or change separate LLCs or additional assumed names later. Entrepreneurship is all about moving things forward and constantly learning and adjusting as you grow. For this particular issue, ensure you at least have liability protection to protect your personal assets from risks incurred by your business. You can always add additional liability protection between businesses later. (Although if you’re ready now, we’re of course ready to help 🙂)

Whether you’re ready for your first LLC, you want to talk about adding additional entities to a business you already have, or you want to form a holding company with multiple businesses underneath, we’re here to help. Feel free to fill out our contact form for more info. If you’d like more to read, we’ve linked some excellent resources below: