More flexible than corporations, with fewer recordkeeping requirements and limited personal liability for their owners, limited liability companies are one of the options you can choose from when creating your business. But can you create more than one LLC and what does that require?
Although it is actually quite frequent for a sole owner or a group of owners to have more than one LLC, you need to know exactly which the situations are when multiple LLCs can help:
- When the owner has two or more businesses and want to minimize the risks if one of the business should fail. If for example you own a real estate agency and a steel manufacturing business and the real estate business is not going so well. If the first business fails, you will probably lose the money you have invested in it, but you will not lose any money or assets invested in the steel manufacturing business since it is a totally different business from a legal point of view.
- When the owner or owners are planning to launch a new product or service on the market and they want to protect the rest of the company in the eventuality that the new product or service will not have the expected success.
- One of the owners of an LLC decide he or she would like to also invest in another limited liability company.
- Another situation in which multiple LLCs can be a very good idea is the real estate business. There are many landlords who prefer to set up a separate LLC for each building hereby protecting their assets from the effects of an eventual lawsuit for one of the buildings.
While owning more than one LLC can be a wise business decision, it is also more complicated than owning just one. More limited liability companies means more fees, paperwork, tax forms and at the same time, an increased possibility of potential conflicts of interest. If for larger businesses this might not be an issue, if you have a small business, you should carefully weigh the benefits of having multiple LLCs to the extra costs and administrative work involved.
Forming an LLC and Maintaining Multiple LLCs
The process of creating an LLC is not complicated and includes filing articles of organization with the state, paying the filing fee and defining an operating agreement detailing how you will manage the LLC. If you want to form multiple LLCs, you simply repeat the process for each LLC. Each LLC needs to have a separate bank account, keep separate records and in some states, it is also necessary to file an annual report.
Managing Taxes for Multiple LLCs
Members of more than one LLC need to file additional tax forms and track income and expenses for each LLC.
If you are the owner of a single-member LLCs you will be taxed similarly to a sole proprietorships and you need to report incomes and expenses from each LLC on a separate schedule that you will attach to your personal tax return.
If you are a member of a multi-member LLC you will have to report your share on a schedule attached to your personal tax return since a multi-member LLC is automatically taxed as a partnership. This changes if you have reported the multi-member LLC as a corporation, in which case it will be taxed as the type of corporation you selected (an S corporation or a C corporation).
By starting an LLC you can avoid personal liability and sometimes owning multiple LLCs can be a solution. Still, multiple LLCs mean additional paperwork and keeping the individual LLC’s finances separate to ensure clear reports.
Avoiding conflicts of interest
As a LLC member you will be required to place the interest of the LLC ahead of your personal interest. In order to avoid conflicts of interest you are not allowed to compete directly with an LLC that you are a member of, you can’t make secret deals with the LLC that will bring your personal gains or in any other way secretly profit from LLC activities. This is why being a member in multiple LLCs can make things more complicated, especially if you are put in the situation of having to protect, promote or represent the interests of one LLCs which is competing or carrying commercial activities with another LLC in which you are a member.
Let’s say for example that the same individual owns a bakery and a flour factory and he or she wants to give the contract for supplying flour to the bakery, to the factory where he or she is an owner. This would be a conflict of interest since he or she would personally benefit from the contract as owner of the flour factory, while possible violating his or her duties toward the bakery. Some states allow this type of conflict to be solved by disclosing the conflict to the other members of the potentially effected LLC and making them part of the decision to give the contract or not in such as situation.
The main rule in such situations is to disclose any matter that you consider to be a potential conflict of interest and to document the decisions made on the matter. Make sure also that you know and understand the requirements defined by law states and operating agreements on the subject. State law on members duties towards an LLC differ from state to state. There are states where in a manager-managed LLC, members owe a duty if they act as managers, and states who allow members to change or eliminate duties through the LLC’s operating agreement.