How do I legally create an "umbrella" company that has several different types of businesses under it? Do I incorporate, use dba's, etc.?
Instead of creating several LLC's is it possible to have one umbrella company such as "Company ABC" that has "House of Lights", "Marketing For You", and "Life Coach XYZ" under it? This way only one business is technically formed with different offshoots?
Sherri: The main purpose of having multiple entities is liability protection. If you have formed and LLC or corporation, you know that if you follow your state laws your personal assets will be protected from lawsuits and most other creditors. Forming multiple entities cuts off the assets from each business from exposure from a lawsuit in another business. If, for example, "Marketing For You" were sued, the assets from "Life Coach XYZ" would be protected. You can put all of the businesses in one entity with multiple DBAs, but I usually advise my clients to avoid soing so. If your businesses are successful, you certainly will be sued at some point. For just a little more bookeeping inconvenience (no major tax difference), you could significantly minimize your exposure with multiple entities. Feel free to contact me to discuss this further.
I just want you to understand the issue form a liability perspective. So if your goal is to limit liability between the ventures then I hope this helps. You will also have to consider the tax implications and expenses associated with filing multiple individual returns, or one large return for multiple legal entities under uno holding company.
First, a holding company is not a holding company if there are no legal entities under it. DBAs are not legal entities. Its like having multiple aliases for one individual. An individual is still the same individual no matter what aliases that person may have. The reason being is that all the aliases are under the same social security number, or under the same EIN for a business.
Many have a misconception and believe that using DBAs under one legal entity give them a Holding Company status when in fact it does not. DBAs are not considered separate legal entities because they fall under the same EIN as the actual legal entity. The legal entity has full exposure of any and all DBAs. Meaning that if one DBA is sued then all DBAs and the legal entity are legally liable. So, if one of the ventures goes bad the legal entity is not able to terminate it or file bankruptcy on the DBA.
The legal entity must have other legal entities as subsidiaries or divisions in order to qualify as a Holding Company and benefit from the individuality status under the law. The point is that those are also separate legal entities (DBAs do not qualify). If one of those ventures goes sour then the Holding Company can terminate, file bankruptcy, or take any other action necessary without the fear of being liable for that legal entity's financial or legal responsibility (provided that the corporate veil was not pierced).
I have more to think about (on the side of Sherri) before you can determine how you are setting up a LLC, Corp, etc.
1. Are you considering having other shareholders?
2. Is the purpose to maintain one corporation for taxes and save this way?
-It may be hurting vs helping you.
3. If you have a dba, someone may inc. your company name unowned.
4. Awarding a shareholder in lieu of finances can reduce your overall tax payment on a personal level.
JUST CURIOUS WHAT IS THE PURPOSE OF DOING THE DBA
It is possible and quite common, for a business to act as a holding company or operating company for other, related entities. I think it's imperative to know what each entity does and what you want the parent or holding company to do for it and the related risks associated with each.
Sherri: What is the underlying reason that you want a umbrella company or phrased another way, a "Holding Company"? Are you trying to do asset protection? If so, there are other things to consider that are very important. Is it for some sort of tax purposes?
From your description it sounds like you want one company that markets itself under different names. Again, the question would be why?
Per the IRS:
"A personal holding company: Is defined in Internal Revenue Code section 542 (http://www.irs.gov/publications/p542/ar01.html).
A corporation will be considered a personal holding company if both the Income Test and the Stock Ownership Test are met.
- The Income Test states that at least 60% of the corporation's adjusted ordinary gross income for the tax year is from dividends, interest, rent, royalties, and annuities.
- The Stock Ownership Test states that at any time during the last half of the tax year, more than 50% in value of the corporation's outstanding stock is owned, directly or indirectly, by 5 or fewer individuals."
For tax years beginning in 2013, the tax on undistributed personal holding
company income has increased to 20%.
This is a hybrid inquiry in tax and legal areas. Unless you expect to encounter a large potential liability risk in one of the business lines, or you want to be able to kill an unsuccessful unit without having the ongoing units being responsible for its debts, it is ordinarily cheapest to have a single legal entity with multiple d/b/a activities. Every entity has attendant costs in legal and accounting fees.
You'll need to think about what your goals are in creating this organization. In our case, here in Illinois, we were looking to achieve maximum utilization of hard and soft resources while maintaining strong corporate veils for each of the "sub entities". Our "holding company" was an LLC while each of the seven corporations until its "umbrella" were either C corps or S corps. The election to the type of corporation was done only after much discussion with our tax accountants. Through this large entity we were able to negotiate very favorable insurance coverages yet shield each of the member companies in the group from any risks inherent to any particular operation.
Basically, figure out what you're looking for then sit down with your legal and financial resources to determine the best scenario(s) for your jurisdiction.
And above all, KEEP VERY GOOD RECORDS ON EACH OF THE CORPORATIONS, especially all aspects of your intercompany resource charges or the entire group can be treated as an Integrated Business Enterprise.
Sherri, that is not a question to mess with out here online; or you could create tax and other implications, you never intended.
I would take this question up with a tax accountant and/or lawyer...even if it through an initial consultation with them to learn how they can help you.
If in the U.S. you can form series LLCs out of Delaware with foreign qualifications in the states it's operating. Or you can create entities with ownership of the lower entities by your 'umbrella'. These are VERY complex to keep up if you are doing this by yourself because of the operation of tax laws and state laws and foreign qualification fees and with each state you are operating you have to keep up the requirements in each. Before you decide to create a bunch of entities, it is best to come up with what you are attempting to do with your products and why and then consult with an attorney about the best way to do that, keep the most of your money with the least hassle for entity compliance. Just consider how many different tax returns you have to file for each entity. It gets VERY expensive.
If you are in the United States, one of the best ways to do this is to use an Illinois Series LLC. Illinois is the latest of the 7 states which have enacted the series LLC laws. It also has the most favorable laws of those seven. Much like Delaware corporations, you need not be in Illinois to use this law. With the series LLC, you create one master LLC and then can create other LLC's under it in a series. If formed correctly, each LLC in the series is considered separate for liability purposes and can have different ownership. At the same time, funds can flow to the master LLC and you have the tax advantage of the LLC.