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.
You can do it the way you describe, with the umbrella entity filing dbas as needed. The problem with your approach, however, is that each line of business will be subject to the liabilities of the other businesses. From an accounting standpoint, you can keep separate books for each business, but they will be merged in your tax returns.
Assuming you want to create a company with a variety of divisions, you can from a corporation and then register a name for each business with the local authority. This depends on which state you are operating these businesses.
You can also create a Series LLC in DE, in which you have eachj business as a separate unit of the series.
This all depends on the type of businesses, size of the businesses and how you want to operate them.
I am based in Australia and my views are somewhat bias toward our own legal and taxation environment however, generally speaking, the issue of risk and asset protection together is the primary driver to the use of multiple entities and holding companies. This is followed by finance and third party equity participation. With larger concerns, separatae legal, operating and management structures are used to manage efficiency contamination between business units.Lastly, activity across jurisdictional borders does warrant consideration of legal structure. I dont think from your information that is a concern for you.
The best thing for you here is to get specific about your business and objectives and get some direct tailored legal advice and keep in mind, if there is no compelling reason to make it complex, then keep it simple.
Still another "it depends." You can use one company and then use dba's. The issue is liability, and whether you want each of the different businesses to be totally separate. If you need to separate them, you'd probably want to use an LLC or S corporation (assuming you are eligible too) as the umbrella company, and then form an additional entity for each business, which your umbrella company would own. You should check with a tax lawyer or your accountant, because there are tax consequences to how you set all this up. Good luck!
Sherri, there is no reason to do so. Each entity you formally organize is it's own being - it can be sued, it can sue, it can engage in contractual negotiations, etc. A primary reason to organize as a corporation, LLC, partnership, etc. is to create a roadmap, if you will, as to how the business is going to be managed and operated. Another significant benefit of organization is to limit damages in the case of a lawsuit. Should you organize a parent corporation and then organize subsidiaries and a verdict be rendered against any of the subsidiaries in a lawsuit, the parent company will also be pulled in and any assets (the other subsidiaries) of the parent company can be taken to settle the obligation. If you have different businesses, organize them independently. I won't even go into the tax nightmare you would create.
One thing to keep in mind is that, technically speaking, the companies in your example don't have to share a parent or be in any way connected with each other in order to grant each other licenses and rights (for naming, etc.).
In the USA (as per Scott Zucker's post) there may be a really good reason why you shouldn't create an umbrella.
NOW - if you want to create a holding corp outside of the USA, and switch those LLC's to S-Corps... that may be a more viable solution. Still, you'd have to have a decent motive to do that.
if you were in Australia i could help you with question as i have that set up my self... not sure how the corporate laws work in the US so my suggestion is to seek some good legal advise to get maximum legal protection....
The way my companies are set up gives me complete protection personally and also protects my assets.
This is what i have;
My "umbrella" company is incorporated and trustee for "xyz" trust a trading trust. as such my "umbrella" company is not a trading company and can not be sued.
Under my "umbrella" company i have 4 other incorporated companies each as trustee for a trust trading as a sole trader and my "xyz" trust is the asset holder for those subsidiaries.
The "umbrella" company only provides an administration service to the 4 subsidiaries and therefore gets paid for that services.
It can get collocated so as i said get your self a good lawyer to set it up for you and make sure you have trusts set up in between your umbrella company and the trading companies.
Hope this helps
We operate a consolidated company in Canada that acts as our umbrella company and have a couple of businesses under "operating as".
I'm not sure exactly how it works in the US but I think it's similar.
Depending on where tyou are a HOLDING can provide the solution you are looking for.
I will be glad to help you do this, as a business consultant I have helped several clients restructure their companies
Simple question for your accountant/lawyer - probably an LLC with a general structure i.e. not a specific business designation.
BTW, you'd better go see your accountant and/or attorney too. If you don't maintain your LLC properly (minutes & filings etc.) and you have to "visit" the legal system, you may find that the court doen't consider you LLC legal.