Should You Use Multiple LLCs?

Should You Use Multiple LLCs?

  

You have multiple business enterprises going. Should you consolidate them all under a single LLC, or should each be placed in a separate LLC?

This article explores the pros and cons of using multiple LLCs. Let’s start with the bad news first, the cons.

Cons

The most obvious con of forming multiple LLCs is the cost.

First, it costs money to form an American Samoa LLC, so the more you form, the more it costs. The costs of LLC formation include both the service fees of your attorney (or of an online document processing company such as Legalzoom); and the filing fee for the state you’re creating your LLC.

In addition, some states (such as California), charge an annual “franchise tax” or equivalent fee on each LLC.

Therefore, if you have two LLCs, then your cost is twice as much annually in these states than if you had all your businesses under the umbrella of a single LLC.

The other con of multiple LLCs is the additional administrative work associates with owning more than one LLC. This is particularly a problem during tax time.

For example, every multi-member LLC must either file a Form 1065 annually (for LLCs taxed as partnerships) or a Form 1120 (for LLCs taxed as corporations).

Next, each multi-member LLC must issue K-1s to all the members.

So, if you have multiple LLCs, you’re going to have multiple tax filings and K-1s flying around.

As a side note, single member LLCs treated as disregarded entities would consolidate all their income and expenses on the owner’s Schedule C, so multiple single member LLCs don’t have this particular problem (though you still bear the cost of forming each of these LLCs).

Pros

The biggest pro of having multiple LLCs is the enhanced liability protection. If all your business operations are in a single LLC, if one business gets sued, then the assets of all the other businesses within the LLC are exposed to that liability.

This is particularly the case with real estate.

My firm has clients that are large commercial developers, and every new development is a separate LLC. Often times, each phase of the development will be a separate LLC. In addition, there will be separate LLCs for the commercial, residential, and light industrial portions in a mixed-use, planned community (e.g. new-urbanism communities).

The reason for separating your real estate into separate LLCs is so if there is a problem with one piece of property, the liabilities caused by the property don’t threaten your other assets.

We’re not talking only about the proverbial “slip and fall” case. While the prospect of someone falling and injuring themselves on your property is a common concern portrayed by the media, one of the biggest risks to owning property is environmental.

Environmental cleanup costs can often exceed the value of the particular piece of property. And you don’t have to be at fault to be liable for cleanups–if there is contamination at your property, the government will hold the owner responsible. If someone else caused the problem (such as a “midnight dumper”), then you are free to pursue them. But in the meantime, the government expects you to pay.

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