When Should I Start a 2nd LLC? A Practical Guide for Business Owners
If you are trying to decide whether you need a second LLC or not, it can be a tough decision to make. There are a lot of variables surrounding this choice, but for the most part it can be simplified into a few questions to ask yourself. If you are starting to offer a new service it's possible you do not need to start another LLC, but if this service is drastically different from your current offerings, or could possibly give customers a reason to sue you and add more risk to your operations it can help protect your other business from this liability for form a second LLC.
This guide will go into more depth on these topics but starting a second LLC can be beneficial to business owners who want some more protection from liability, give a distinct separation between two businesses that are operated by the same owner, and create advantages in ownership structures for your businesses.
When More Than One LLC Makes Sense
As a business owner, you are most likely used to taking some risks. However, some business products and services can create more risk than others. If you plan on starting to offer services that carry more risk it can make sense to want to form a separate LLC to minimize this liability. This way, if your higher risk business is sued or runs into issues then your first LLC is protected from these issues and they are only able to go after the second business. This separation is an important factor as it eliminates the worry of losing money on your first business venture because of your new one.
Starting a second LLC can also be used to create a distinct LLC from your first one to avoid confusion and have a product or services list that makes sense. If your first business is a power washing business and you want to open a coffee shop, this drastic difference would make total sense to cause the need to form a new LLC to operate the coffee shop under. Just because you are in one industry does not mean you are not able to branch out and try new things as a business owner. But, typically it will make this transition between industries easier by forming a new LLC that this new venture will operate under.
Another reason you might want to start a new LLC is because of taking on new partners and investors that will have a share of the ownership of the business. This allows you to stay as the sole owner of your first business, and bring on new partners and investors to share ownership of your second business without giving up any percentage of your initial business. You will be able to separate investor groups for each business this way and maintain separate financial records between businesses.
When One LLC or a DBA is Better
Sometimes it can create more confusion than help if you are a small business owner and try to manage two different LLCs. The administrative complexity and costs of maintaining separate business entities can make things more difficult, especially if you are trying to manage all these things on your own. A workaround for this issue is to form a DBA that is typically less expensive to form and maintain while still giving you some distinction between your services that are offered under each business name. A DBA will not give you any limited liability protection and is connected to your LLC, but this gives you more flexibility in being able to operate under a different name than your LLCs, as well as being used in marketing and outreach campaigns.
If this new venture has similar risk to your current LLCs, or if the customers you are targeting will be the same then it can be easier to form a DBA or just operate under your current LLC. You can always offer new services and this does not require you to create a whole new business. For example, if you are a marketing agency and you plan to start offering website design and consulting you don't need to form a second LLC as both of these target markets and main customers will be the same and expect to work with the same business.
Filing Fees and Maintenance of Multiple Businesses
Regardless if you have one, two, or multiple businesses you will be required to pay filing fees and ongoing maintenance fees for each business entity. These fees will vary depending on what state your business is registered in, but this can get pretty expensive if you are maintaining multiple LLCs. You will also need to track the renewal dates of your annual reports for each business and ensure you are submitting these documents on time. It's important to stay compliant and up to date with these reports to avoid administrative dissolution, for more information on annual reports see our guide on them here!
Another aspect to consider when thinking about forming multiple LLCs is making sure each business has a valid registered agent with updated information. Each state will require your business to have a registered agent to receive important documents and service of process on behalf of the business. This individual will need to be present at their listed address during regular business hours (9am-5pm M-F). Now you are able to be a registered agent for multiple businesses, but if you are going back and forth and these businesses have different locations it is not entirely possible to do this yourself. You can either appoint a trusted friend, employee, or family member to act as the registered agent or you can hire a professional registered agent service. For more information on registered agents, we have a few different guides and pages on them you can access from our page here!
When you decide to form a new LLC, it does not just magically form. You will need to submit documents to the Secretary of State and pay a certain amount of filing fees. If you include everything such as the filing fees, annual report fees, registered agents, and ongoing compliance costs it can end up being pretty expensive to maintain multiple businesses. It's important to be sure this is a good trade off for you as a business owner to pay an increased amount of fees to enjoy the benefits of having another LLC.
Drafting Operating Agreements For Multiple Businesses
As mentioned before, creating another LLC can give you more flexibility in how ownership is divided between your other businesses and your business that is potentially taking in more partners or investors. It is not required, but an extremely important aspect of business ownership is having an operating agreement drafted to define specific ownership percentages, voting rights, and more governing details involving your business entity.
Having operating agreements in place for each business you own allows you more flexibility in how you spread up ownership in these businesses and creates a legal document that enforces these ownership percentages. For example, your first business can be 100% owned by you, but your other LLC can give you 60% ownership while giving the rest to other partners or investors in the business that also have a stake in the company. This makes fundraising easier and gives investors a clear percentage of involvement in the business while still ensuring you maintain overall ownership.
Asset Protection and Liability Protection For Multiple Businesses
A major advantage of forming a separate legal entity is the liability protection that is granted to business owners that protects their personal assets, such as your home and savings, from business debts and legal obligations that might arise. This liability protection is very beneficial, but it can be lost if your business is not operating correctly. Things such as fraud, mixing of personal and business funds, and failing to maintain compliance with the Secretary of State all have the chance to "pierce" the corporate veil which allows courts and debt collectors to go after your personal assets and not just the business assets.
Ensuring your business has a clear separation of assets allows you to avoid these issues. Creating separate bank accounts for each business makes this easier as you are more easily able to track spending and payments for your businesses. Also, when tax time comes around it is much more simple to account for things from one bank account for one business as opposed to running multiple businesses out of your personal bank account.
How Firstep Business Solutions is Able to Help Business Owners
At Firstep we ensure compliance for our customers and track all annual report due dates for you so you don't have to. This can be helpful when managing multiple businesses, especially if they are in different states with separate schedules for renewals and varying requirements. Firstep also is able to draft custom operating agreements, banking resolutions, and offer registered agent services for businesses that need this done, which can save valuable time and ensure all language is correct in these documents.
Many LLC owners use our services to avoid any additional fees that are incurred by their business for missing reports or falling out of compliance with the state. In addition to formation and annual reports, Firstep offers multiple other services such as a custom CRM system that helps owners run multiple businesses from one dashboard, obtaining EINs for businesses, and updating or changing any information in case your address or owners change and need updated with the state.
Overview - Should You Form Multiple LLCs
Having more than one LLC can be complicated, but if your business meets the requirements talked about in this guide then it can be extremely beneficial to do this. If your new business venture will involve more risk than your current business, offer drastically different products or services, or have a different ownership structure involving investors and new partners then it can make sense to want to form a new LLC. This will create a separation between the two businesses while still allowing you to maintain ownership of both.
In some instances, you will be better off forming a DBA and although this is not a separate legal entity, this will give you more flexibility in naming and marketing efforts. You are able to branch this off of your current LLC and expand your product offerings while still keeping administrative costs low and not dealing with complicated requirements that owning multiple LLCs involve
Professional services such as Firstep are able to form, maintain, and assist you in the ongoing compliance and operations of each business you operate. Whether you own one business, or a handful of them, we will track important dates to be aware of and submit all documents on your behalf to the Secretary of State. To get started, see our LLC formation page here!
