Question & Answer Forum...
Question Date: 10/16/2007 12:37:43 PM
This question is about combining more than one business entity and has been rearranged. Is it OK to combine more than one business entity or should the two be kept separate?
If it is OK to put two or more businesses together, please provide information and tips on the best way to operate it correctly.
Answer Date: 10/17/2007
We aren't certain what organizational structure you have selected for your business (i.e. sole proprietorship, partnership, corporation or LLC), but many small business owners find that there is little reason to form a corporation, LLC or other business entity and operate as sole proprietorships or general partnerships because the risks arising from the business activities are either remote or insured with auto and homeowner's coverage or separate policies.
However, when your business is structured as a sole proprietorship or general partnership (even with a DBA), all of your or your and your partner's business and personal assets are subject to the claims of both business and personal creditors. Though some operations may not create numerous business risks, lawsuit claims can be devastating and unpredictable. Your risk assessment includes not just the business assets; but also, the amount of your personal assets.
In terms of multiple businesses, small business owners have discretion and flexibility in operating multiple businesses under one entity. However, activities must be consistent with the business purpose of the entity as explained in corporate articles, bylaws, LLC Operating Agreement, or other governance documentation.
When properly structured, business owners can generally operate multiple businesses under a single LLC or corporation- or a single sole proprietorship or partnership for that matter- as departments or divisions with different trade names (fictitious, assumed or DBA names). Whether you operate multiple businesses under the same sole proprietorship, partnership, or corporation, LLC, or other entity has to be evaluated based on your long-term plans. Many business owners opt to put separate businesses into separate entities - subsidiaries or affiliates.
The primary reasons for doing so are that it allows for the possibility of bringing additional owners into one business and not the other and it also protects the assets of one business from the liabilities of the other, if one of the businesses gets into trouble. Businesses engaged in similar or related activities are better suited to a single entity structure rather than unrelated or dissimilar businesses, like PPL and real estate educational activities. Also, most PPL associates operate their businesses through unincorporated sole proprietorships because from a personal asset protection standpoint PPL activities are fairly low risk.
From an administrative standpoint, operating your businesses under a single entity would pose the least administrative burden because with only one business entity you only have one set of income tax returns and one set of governance obligations to worry about. Liability wise, a business entity provides personal asset or corporate veil protection to any lawful activity conducted under that entity, so operating multiple business activities under a single entity does not dilute the level of personal asset protection.
In terms of business operations, with multiple activities conducted under a single entity, it would be advisable to have separate bank accounts and accounting records for each activity even though both activities would report together for tax purposes. This would better facilitate financial reporting for and management of each activity.
When starting a new business and forming a business entity, business owners generally use local professionals (CPA, lawyer, and business insurance agent) for help in reviewing their business plans and evaluating business entities, tax, licensing, legal, and risk management issues. If you do not have a CPA, we have had good feedback on Padgett Business Services, which has franchisees around the country.
For a referral to a local office, call (800)723-4388. As a PPL member, you can contact your Provider Lawyer for advice and assistance with business risk issues and entity formation issues. You can reach your Provider Lawyer at the phone and fax numbers in your PPL materials or through PPL Customer Service at 800.654.7757.
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