Looking for some quick advice on business entities.

[fuzzybabybunny]

I'm looking for some quick advice on what kind of business entity I need to change my business to. I started off as just me working by myself, and instead of a sole proprietorship, I went with an LLC for some small amount of protection.

I'm going to be growing the business. I'm currently structured around contractors for labor, but could possibly hire employees in the near future (although I'm not liking having to deal with the extra paperwork and overhead of employees).

Depending on if I can find trusted, effective business partners, dividing the company into shares is a possibility.

I want to have a main company, XYZ, with many DBAs or even subsidies. These DBAs possibly won't even be doing the same kind of work. One will be focused on web marketing, the other on image/video processing, the other on solar energy, etc.

The easy answer would obviously be to shell out hundreds of dollars to talk to an attorney, but I'm a firm believer that the answer can be had without talking to a lawyer.

Any ideas?

 

[dougp]

Contact a lawyer, or contact SBA - unless there's someone here who's a business owner doing the same thing as you proposed, you will never get the correct, legal (or best financial) answer.

 

[Dr. Zaus]

http://www.hawaii.maxfilings.com/form-hawaii-S-Corporation.php

you want a corp with pass-through losses.

maybe multiple: depends on the situation; always one.

 

[highland145]

S corp will give you shares you can divide up.

I would think multiple DBAs under one corp would not be good. One gets sued and the others can lose assets. I could be wrong.

 

[fuzzybabybunny]

Hmmmm... my primary goal is to have one main business. Names XYZ.

XYZ will have a number of subdivisions, many which will have nothing to do with each other. When I say subdivision, I really just mean sub-level entities that provide different, unrelated services.

One for Real Estate Photography.

Another for video and photo processing - it can be tied into the real estate photography, but will also provide processing services to other non-related photography types.

Another for solar power or renewable energy.

Another for an application that I'd like to develop.

Another for sustainable housing.

And I want another subdivision devoted to positive social change. Building wells for poor Africans, financing for small 3rd world businesses, etc.

Anything else I decide to take on.

 

[sactoking]

S corp will give you shares you can divide up.

I would think multiple DBAs under one corp would not be good. One gets sued and the others can lose assets. I could be wrong.

Without getting too in-depth in business entity formation (it's a topic I could talk about for ages) I'd like to point out that "DBAs" are just fictitious names for the same company. For example, you could have FuzzyBabyBunny LLC dba FBB Enterprises or FuzzyBabyBunny LLC dba SnorglePuffs.com. In both cases the legal entity is FuzzyBabyBunny LLC, you just call the business something else publicly. There are not multiple entities sharing assets.

 

[Dr. Zaus]

There are not multiple entities sharing assets.

right, but his point about the assets of one "business" standing good for the liabilities of the other stands.

I would never LLC.

I would, on the other hand, s-corp separately each entity that has any chance of having liability. my fuzzy proto-floopy friend, you may want to consider that you are driving in many many different directions; If you focus on one thing at a time (one s-corp at a time) you may be able to get things off the ground enough to hire a manager for your organization and then move on to the next venture.

 

[fuzzybabybunny]

Without getting too in-depth in business entity formation (it's a topic I could talk about for ages) I'd like to point out that "DBAs" are just fictitious names for the same company. For example, you could have FuzzyBabyBunny LLC dba FBB Enterprises or FuzzyBabyBunny LLC dba SnorglePuffs.com. In both cases the legal entity is FuzzyBabyBunny LLC, you just call the business something else publicly. There are not multiple entities sharing assets.

I see. So FFB LLC will get sued if FBB Enterprises or SnorglePuffs gets sued.

Is there a way for multiple entities to share assets or even revenue/capital, but quarantine risk/liability to the specific entity?

I would think that that would be the ultimate "entity."

Like a sum of body parts that can all work as one or independently, and share the same resources and funnel the rewards to a top central unit, but if something bad happens, only that one body part is affected.

 

[Dr. Zaus]

Is there a way for multiple entities to share assets or even revenue/capital, but quarantine risk/liability to the specific entity?

Since you can pass losses through to yourself via an S-corp you can use the loss in one s-corp you own to off-set gains in another s-corp you own.

 

[highland145]

Without getting too in-depth in business entity formation (it's a topic I could talk about for ages) I'd like to point out that "DBAs" are just fictitious names for the same company. For example, you could have FuzzyBabyBunny LLC dba FBB Enterprises or FuzzyBabyBunny LLC dba SnorglePuffs.com. In both cases the legal entity is FuzzyBabyBunny LLC, you just call the business something else publicly. There are not multiple entities sharing assets.

They're acting separately but all owned by FBB,LLC so if one gets FBB,LLC sued wouldn't they all be in jeopardy?

 

[fuzzybabybunny]

right, but his point about the assets of one "business" standing good for the liabilities of the other stands.

I would never LLC.

I would, on the other hand, s-corp separately each entity that has any chance of having liability. my fuzzy proto-floopy friend, you may want to consider that you are driving in many many different directions; If you focus on one thing at a time (one s-corp at a time) you may be able to get things off the ground enough to hire a manager for your organization and then move on to the next venture.

It may look like I'm driving in many different directions right now, but I can assure you I'm quite focused.

Right now I just want to set the right *foundation* so that in the future when the business with its many managers wants to go in separate directions, it's best structured to do so.

Basically I want a foundation that doesn't have an iron box around it, like a sole proprietorship has. I want something that is easily expandable and modular should the need or opportunity arise.

 

[highland145]

Multiple s corps will each have to have a tax return done. That will be expensive.


Maybe 1 s corp and a bunch of liability insurance.

 

[Dr. Zaus]

Multiple s corps will each have to have a tax return done. That will be expensive.

Depends on weather or not you know how to do your own taxes.

Being in business is very expensive when you don't know how to run a business.

I highly recommend that our fluffy friend take a few accounting courses at the local community collage and read up on taxation; then get to know how to use peach-tree.

I'm of the impression that almost everyone (three people excluded) here is smart enough hand auto-didactic enough to figure out how to run a business and file taxes.

 

[Fern]

I'm a CPA.

Normally, the answer would be an S corp. However, you have some complications.

1. Multiple entities. You seem to be saying you want a (mother) corporation with different subsidiaries. This is also referred to a tiered ownership structure etc.

But be careful. Let's say Corp A is the mother corp, and it has subsidiaries 1, 2 3. This means Corp A owns the stock of corps 1, 2 and 3. Is that what you mean?

If so, be careful. If the business in corp A is sued you may lose corp 1, 2 and 3 since those corps are the property of corp A (which was sued). You're not using the limited liability shield properly under that scenario.

This is applicable whether you use a (regular) C corps, S corps, partnerships or a LLCs.

The solution is for you to own each one, none owns the other.

The downside is that you will be forced to have each file it's own tax return. You may not care, or be aware, but generally if you have tiered ownership you can consolidate them all into one tax return. Saves fees.

2. If you are going to have partners you should probably see a CPA and an attorney.

Business 'divorces' are common, and can be as nasty as a marital divorce.

I'll give one example. Two guys start a restaurant. They incorporate (doesn't matter if C or S) and each take 50% of the stock/ownership.

After one year one guy decides it's too much work and too little money and he 'quits' the restaurant and gets another job.

What's the problem?

He still owns half of the stock and there's not much the guy still working at the restaurant can do. You can't make him sell or give up the stock. Not without incurring a crap load of legal fees anyway.

The solution: Probably utilize an LLC and make sure the 'member agreement' covers all types of scenarios. E.g., your partner gets divorced and his wife gets 1/2 his stock. Surprise! You've got a new biz partner, one you don't need or like.

An LLC allows for more flexibility in crafting these type of agreements. Corporate law is well established and thus has less flexibility.


There are other factors, but I'll stop here for the moment. I'll check back tomorrow.

Fern

 

[highland145]

Depends on weather or not you know how to do your own taxes.

Being in business is very expensive when you don't know how to run a business.

I highly recommend that our fluffy friend take a few accounting courses at the local community collage and read up on taxation; then get to know how to use peach-tree.

Didn't know that I could do my corporate taxes. Never crossed my mind to check.:\

 

[Dr. Zaus]

Didn't know that I could do my corporate taxes. Never crossed my mind to check.

When I failed at business I filed my three s-corps myself. The first year I went over what I was doing with an accountant to make sure I was good, every year after I did it myself and made sure i kept up with the laws and such.

I had one corp that provided the man power, to another that made the sales and 'did' the service which then rented equipment from the a third (which is the one that made any money and had any assets).

this way if any employee or customer sued I could close shop on that s-corp while keeping all assets free of liability.

Bunny friend:
My office mate says "you may be doing a lot of crack, but that doesn't mean you are focused". That is, not sold that your entities can all be going at once and do well ;-).

 

[BrunoPuntzJones]

If you do an S corporation you'll need to have board meetings, minutes etc, even if it's just a single person. Single-member LLCs you can get away with less paperwork. I'd go S corp as Dixy suggested, just make sure you pay yourself a salary, IRS is getting picky on single shareholder S corps that don't pay employment taxes...

Funneling money from one company to another directly would be bad ju ju, just make a distribution to yourself, then send the money as a contribution from shareholder into the company that needs the money.

Be careful "sharing" resources. You'll need to do rents back and forth, agreements and all. If you get sued and it can be seen that you were using assets of XYZ in ABC, then you are mingling, and the whole idea of having separate entities shits itself and your protection is gone.

 

[Fern]

-snip-

Basically I want a foundation that doesn't have an iron box around it, like a sole proprietorship has. I want something that is easily expandable and modular should the need or opportunity arise.

There is no "iron box" around your current set-up (an LLC that is a 'disregarded entity' for tax purposes. That means you file as a sole proprietor on a sch C.)

You can start all your other businesses under that LLC (but you also lack limited liability, they are one corp for civil liability purposes).

However, as one of them grows you can do a tax free spin off into a separate corp/LLC. It's called a section 351 incorp.

Fern

 

[fuzzybabybunny]

There is no "iron box" around your current set-up (an LLC that is a 'disregarded entity' for tax purposes. That means you file as a sole proprietor on a sch C.)

You can start all your other businesses under that LLC (but you also lack limited liability, they are one corp for civil liability purposes).

However, as one of them grows you can do a tax free spin off into a separate corp/LLC. It's called a section 351 incorp.

Fern

Right. I know that my current setup does not have the expandability qualities that I want. That's why I'm exploring other structures.

I will currently work on the real estate photography aspect of the business, which will include photo and video processing services. I'd like this to be a separate arm of the business though, apart from the real estate photography.

In the future, years down the road, I'll work on other things like solar power and whatnot. I'd like to be able to add these to the primary business like a building block.

 

[CPA]

You don't want to deal with paperwork, but want to have multiple subsidiaries? Your paperwork is going to multiply exponentially.

 

[fuzzybabybunny]

You don't want to deal with paperwork, but want to have multiple subsidiaries? Your paperwork is going to multiply exponentially.

Eh, that's when I'll just have to hire a CPA then.

 

[ElFenix]

NOT YOUR LAWYER DON"T KNOW CALIFORNIA LAW THE FOLLOWING IS NEIGHBORLY ADVICE


if you start mixing assets between various entities the walls of limited liability can be broken down between them. separate assets, separate bank accounts.

 

[sactoking]

I would never LLC.

Why? There are LLC advantages over s-corp in certain scenarios, like newly-created businesses.

I see. So FFB LLC will get sued if FBB Enterprises or SnorglePuffs gets sued.

They're acting separately but all owned by FBB,LLC so if one gets FBB,LLC sued wouldn't they all be in jeopardy?

Not really. When you do a DBA it is a fictitious name filing. The key is the fictitious name does not constitute a new company it is just a legally-recognized "nickname" for the one company. It's like someone named Robert who also goes by Bob. It's still the same person, just two names.

Here’s a rundown of various business entity formations and points to consider:

Sole Proprietorship- Very easy to set up. Usually you just need to do a fictitious name filing with your state, and maybe get a business license. The IRS considers is a “disregarded entity” meaning the taxes are usually pretty simple. The big downside is the business is you and vice versa, so if you get sued you could be up a creek.

Partnership- Basically a sole proprietorship but with multiple people.

LLC- Recognized by the state but not by the IRS. Requires a filing with your Secretary of State as well as an Operating Agreement. Can have one owner or multiple owners. Taxes are not as easy as a proprietorship but not as tough as a corporation. Ownership of the LLC can be bought and sold per the Operating Agreement, but it is illiquid (meaning it can be tough to find a buyer). Set up properly, suing the business won’t affect you personally. All income and losses are passed to you personally so you pay tax at your personal rate. You owe self-employment tax on what you make. You might not owe unemployment tax on what you make.

Corporation- Recognized by the state and IRS. Requires a filing with your Secretary of State as well as an Operating Agreement. Can have one owner or multiple owners. Taxes can be complex. Ownership of the corporation can be bought and sold via shares, but can be illiquid if not publicly traded. Suing the business won’t affect you personally. Income and losses are retained in the corporation. You and the corporation will split the employment taxes. You will owe federal and state unemployment tax. Any excess capital in the company is double taxed when distributed.

S-corporation- Recognized by the state and IRS. Requires a filing with your Secretary of State as well as an Operating Agreement. Can have one owner or multiple owners. Restrictions on number and types of owners. Ownership of the corporation can be bought and sold via shares, but can be illiquid if not publicly traded. Suing the business won’t affect you personally. Income and losses are passed to you personally but you MUST pay yourself a “fair” salary. Salary is subject to employment tax and unemployment tax and capital is subject to self-employment tax and income tax at 15%.

If you have one parent company with multiple subsidiaries you will greatly complicate your bookkeeping and taxes. Also, while each subsidiary might be shielded from the liabilities of the others they could all be liable if the parent company is sued.

If you own multiple businesses separately, so the only common thread is you, you will greatly complicate you bookkeeping and taxes. Also, while each business might be shielded from the liabilities of the others you and all of the businesses could be liable if you don’t set everything up properly and a court finds reason to pierce your shell.

Venue of where you create your companies is important also. Will you be in California? If so, know that you will pay a minimum $800 annual franchise tax per company for each LLC/corp/s-corp you register regardless of whether you are profitable or not. Conversely, you could set up in Nevada and use a registered Resident Agent and insulate yourself from cross-company liability (you own a bunch of unrelated companies, list the Registered Agent with the Secretary of State, and when one company gets sued they can’t subpoena to see what else you own).

Like I said, it’s really complicated and you won’t get a good answer here. You really need to either KISS or have an in-depth consult with a professional.

 

[fuzzybabybunny]

NOT YOUR LAWYER DON"T KNOW CALIFORNIA LAW THE FOLLOWING IS NEIGHBORLY ADVICE


if you start mixing assets between various entities the walls of limited liability can be broken down between them. separate assets, separate bank accounts.

So in conclusion:

There is no such thing as mixing assets and profits and having limited liability at the same time?

In order to have limited liability between each branch, they must each be their own entity with their own bank accounts and assets. The only way to "share" assets would be to do a transaction between each branch (ie. Branch A "sells" assets to Branch B, both of which I own).

In essence, each branch would just be their own separate business. So instead of owning a mother business named XYZ with branches, I'd have to just register and own 3 separate businesses, XYZ, 123, ABC?

 

[sactoking]

So in conclusion:

There is no such thing as mixing assets and profits and having limited liability at the same time?

In order to have limited liability between each branch, they must each be their own entity with their own bank accounts and assets. The only way to "share" assets would be to do a transaction between each branch (ie. Branch A "sells" assets to Branch B, both of which I own).

In essence, each branch would just be their own separate business. So instead of owning a mother business named XYZ with branches, I'd have to just register and own 3 separate businesses, XYZ, 123, ABC?

Pretty much, yes. If you are going to have multiple businesses you have to treat them as separate businesses. Once you start treating them all as extensions of yourself then a court could easily say you didn't manage them as separate entities and you're not entitled to liability protection.

It would be like opening a bank account with you parents. If the bank account is in your name but you give them an ATM card, check-writing privileges, etc you can't later complain when they start bouncing checks.

If you own ABC and 123 and they each have their own bank accounts you can't pay a bill for ABC directly out of 123's account or a judge will say ABC and 123 are not separate companies.