Multiple Companies Under One Roof: Understanding the Basics of DBAs and Holding Companies
Many entrepreneurs realize at one point or another that they have ideas for more starting more than one business—sometimes when they're just starting out, or years down the road. Regardless of when, the question is the same: how can you structure multiple businesses under a single entity?
Structuring different ventures under one roof is a common strategy, especially for large corporations. A quick peek at an international conglomerate like Disney or Coca-Cola reveals dozens upon dozens of smaller subsidiaries, all of them housed under a single entity.
Small businesses can utilize the same structures (and gain the same benefits). There are two main ways to accomplish this. We'll examine each here.
One house, many rooms
One way to structure your multiple business ventures is to form a single company and register as many fictitious names (also called "Doing Business As" names, or DBAs) as you need. Think of it as owning one big house, and inside the house you have many different rooms, each with their own name: the library, the dining room, the smoking lounge, etc.
Imagine that you want to start a bakery. You form Jimmy's Bakery LLC. You work with local farmers to get fresh produce, and you realize that you could also sell baskets of baked goodies and fresh fruit online to people who don't have access to either. It also occurs to you that you could specialize in selling prepackaged frozen pizza dough.
Running three different product lines under one name will likely create a marketing nightmare. Instead, you file two additional DBAs: Jimmy's Fresh Fruit & Pies LLC and Jimmy's Fresh Pizza Dough LLC. Both DBAs are registered alongside your initial company (Jimmy's Bakery LLC).
A DBA doesn't create a new entity; a DBA allows your company to legally operate under various names.
The drawback with multiple DBAs is that your various ventures are all under one roof—and so is the liability. On paper, it looks like you're operating three different companies, but in reality there is only a single entity. Let's say someone eats some bad pizza dough, gets sick, and decides to sue. A judgment against your business could end with assets seized not just from Jimmy's Pizza Dough LLC, but from all your ventures. Not an appealing scenario for business owners.
More articles from AllBusiness.com:
- How to Legally Set Up Multiple Businesses
- What Is a DBA and Does Your Business Need One?
- Changing Your Business Name: A Step-by-Step Guide
- What All Small Business Owners Should Know About DBAs
One property, different buildings
Your second option is to form a holding company. Holding companies don't conduct any actual business. They own—or hold—assets. Next, you form as many additional entities as you need. Each of these entities is owned by your holding company. Many international conglomerates, such as Berkshire Hathaway, operate this way.
Think of it as one large property (your holding company) upon which you build multiple independent structures (your various companies).
This scenario is more expensive. You will have to form more than one entity, which means more paperwork filed and more compliance requirements. In our imagined business above, you'd start by forming Jim's Foods LLC as a holding company, and then each division as a separate LLC (Bakery, Baskets, and Pizza Dough).
The advantage is that liability is divided. That lawsuit against Jimmy's Pizza Dough LLC? A judgment can only seize assets from Jimmy's Pizza Dough, not from every other division. Financial losses are also contained. It is not unusual to find large corporations with sagging profits restructure in order to isolate the portion of the business that is losing money. This is often done with the full knowledge that the new entity will likely fail, but that the damage won't spread to other parts of the business.
This is the most significant reason large corporations are structured this way: to protect assets by dividing liability.
DBAs: Additional considerations
If you intend to have multiple businesses under a single roof, it is best to consult an accountant and a tax specialist, especially if you are going to own a holding company and its subsidiaries. The more income streams you have, the more complicated your will become, and your liability protection will be worthless if you haven't properly kept each company separate.
A good accountant should also be able to structure your finances so that losses from one company might be offset by income from other companies.
As well, don't forget about compliance. If you have multiple entities, you will need to file multiple annual reports each year. You may want to contact your registered agent about a deal to represent all of your subsidiaries (if you have more than one entity).
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