Owning numerous LLCs can make meaning in certain situations, but will require extra paperwork.
Limited liability companies, or LLCs, help company owners limit their liability for company debts. LLCs are more relaxed and have fewer recordkeeping requirements than companies.
If you’re thinking of creating an LLC for more than one company, or you want to invest in multiple companies, you may wonder whether you can own more than one LLC and, if so, what else you need to know.
When Multiple LLCs Make Sense
- Separate businesses. If you have two separate businesses, two LLCs can underestimate your risk if one company fails. For example, if you own successful construction business and then decide to open a restaurant, you could have one LLC for the construction company and start an LLC each for the restaurant. If the restaurant fails, you may lose the money you supported in it, but you wouldn’t be risking your construction company’s assets.
- New product launch. You are launching a new product and don’t want the rest of the company to be at risk if the new creation is a flop.
- Partial ownership. You are already part-owner of one LLC and choose to invest in another.
- You own rental real estate. Many owners set up a multiple LLC structure, with a different LLC for each building they own. This means their general real estate holdings are not at risk if there’s a lawsuit involving one building.
While it can be done, it’s important to comprehend that owning numerous LLCs is more difficult than owning just one.
Multiple LLCs mean additional paperwork and fees, additional tax forms, and the case of conflicts of interest.
Small business owners should weigh the liability benefits of having separate LLCs against the additional cost and administrative work required to maintain multiple LLCs.
Forming an LLC and Maintaining Multiple LLCs
To form an LLC, you must file reports of the organization with your state and pay a filing fee. An LLC also should have an active agreement that describes how the LLC will be managed, as well as the rights and obligations of the partners and managers.
Forming multiple LLCs means completing construction paperwork and paying a filing fee for each LLC. In many states, LLCs must also file an annual report and pay an annual fee.
Since each of your LLCs is a different company, each must keep its bank account and keep its own financial and business records.
Avoiding Conflicts of Interest
LLC members may be bound to place the LLC’s claims ahead of their own and avoid creating disputes between the two. This may mean that LLC members can’t compete directly with the LLC, make secret deals with the LLC that benefit them personally, or secretly profit from LLC activities.
Owning multiple LLCs can complicate things because you may have a duty to both LLCs, and you must take care to avoid violating your duty to one LLC while trying to promote the best interests of the other.
For example, if you own a hotel and a linen supply company, you may want to help the linen company by giving it a contract to supply linens to the hotel. But because you would profit from the contract, you might be violating your duties to the hotel. In some states, deals like this are permitted if you disclose your conflict to other members and the members then agree.
The exact nature of an LLC member’s duties differs from state to state. Usually, in a member-managed LLC, the members owe a duty of allegiance to the LLC. In a manager-managed LLC, the partners owe a duty if they also act as managers. But in some states, LLCs are permitted to change or stop these duties in their operating agreements.
To avoid conflicts, be sure you comprehend your state laws and the requirements of any LLC operating agreements and observe company formalities such as having members vote on important findings. If there’s a potential conflict of interest, make sure you tell it and document any decisions that are made.
Managing Taxes for Multiple LLCs
- Single-member LLCs. Taxed in the same way as sole proprietorships, members report revenue and costs from each LLC on a separate schedule attached to the member’s tax return.
- multi-member LLCs. Automatically taxed in the same way as a partnership, the LLC organizes an informative tax return listing overall income and expenses, and members report their claim on a schedule attached to their tax return.
LLCs also can decide to be taxed as corporations. LLCs taxed as corporations must file the right returns for the type of business they select.