Why You Should Never Use a Single Entity to Own Multiple Businesses

Many business owners use entities such as corporations and limited liability companies (LLCs) to hold their business assets.  This is because these types of entities offer business owners something called limited liability.

With an entity such as a corporation or LLC, a person’s liability is limited solely to their ownership interest in that entity.   Should the entity incur liability or other debt, the business owner’s personal assets (for example, their house, cars, jewelry, etc.) will be protected (assuming that the entities were both formed and operated properly).

Many business owners have multiple businesses or lines of business, yet they sometimes use a single entity to own these different businesses.

Big mistake.

The reason is simple:  Cross-liability.

Let’s say you own a single entity, ABC, LLC,  that operates a retail electronics business.  You then decide that you want to open two additional, yet completely different, businesses.  One is a driving school and the other prepares income tax returns. Like I said, three totally separate businesses.  

Rather than pay the filing fees or legal/accounting costs to open an additional two entities, you opt to have ABC, LLC own all three businesses.  

One year later, all three businesses are booming.  Then, the driving school is involved in a massive car accident involving fatalities (sorry, but I have to make things appear as bad as they possible could be).  

The driving school is sued.  Well, actually, ABC, LLC is sued, as it is the entity that owns the driving school.   Remember, it doesn’t have to be a fatal car accident. It could be any breach of contract or other issue that incurs liability.

The driving school incurs liability in an amount that exceeds any insurance it carries.  So, the plaintiff (the person who brings the lawsuit) goes after the assets of ABC, LLC, which owns the driving school.  

Guess what?  ABC, LLC’s assets also consist of the electronic distribution business and the tax preparation business.  In the end, the plaintiff takes all of these assets in order to satisfy the liability of ABC, LLC because it owned the driving school.

Could this have been avoided?

Yes, easily.

ABC, LLC owned the electronics distribution business.  When you started the tax preparation business, all you had to do was form another entity, MNO, LLC.  Then, when you started the driving school, you would have formed a third entity, XYZ, LLC.

Then, when the driving school was sued, only XYZ, LLC would be sued.  The other two entities, which owned the other two business respectively, being wholly separate and apart, would have no reason to be named in any lawsuit, as they have no connection (nexus) to the matter and therefore, would not incur any liability.  

Even if all of the assets of the driving school went to the plaintiff to satisfy a judgment, it would only be the assets of XYZ, LLC.  The other entities would remain intact, and your electronic distribution and tax preparation businesses would remain unaffected by the liability incurred by the driving school.

To form the additional two LLCs would cost you additional money, however, you have now lost all three of your businesses because you didn’t spend that money.  Don’t you wish that you had?

Therefore, whenever you have separate businesses, it always makes sense to form separate entities for each, thereby keeping them all separate and apart from each other.

Should you be thinking about starting a business and/or forming an entity, it is prudent to have an experienced attorney assist you with the formation and drafting of necessary documents. Contact the Greenbaum Law Firm, P.A. to schedule a consultation today.

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Greenbaum Law Firm, P.A.

The Greenbaum Law Firm, P.A. is a boutique, client-centric law firm concentrating in the areas of business and corporate law, contracts and agreements, and real estate. Our unique approach to the practice of law consists of positioning our clients at the center of the legal practice and pursuing their objectives in the most efficient and transparent manner.

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