WHEN IS IT BETTER TO HAVE TWO LLC’S?
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Legal Info for Businesses
Common Question: If my business plan includes two relatively distinct business purposes/activities (for example, one offers a service and one will offer products after the Research & Development stage) and I will be using a different trademark for each purpose/activity, should I operate both activities under one legal entity [hereinafter referred to as an LLC] or establish two LLCs, where each business activity will operate under a separate LLC?
General Response: Often establishing two separate LLCs is recommended in such cases, for reasons including the following (Note, I use the analogy of two hypothetical persons (Joe and Larry) for clarification purposes only):
- Advantages to establishing and operating the two business activities separately, each under a separate LLC:
- Separation of Liability. One of the major advantages in having two separate entities for two business activities include, separation of debt and other liabilities. Generally, debts and other liabilities of one LLC will not be held against the other LLC. For example, if a customer/client of ABC, LLC is injured and alleges that the injury is the result of business activities of only ABC, LLC, then, generally speaking, XYZ, LLC’s assets (at the time and future assets) are not at risk of attachment, seizure and sale to satisfy a judgment against ABC, LLC (and vice versa). Note, in many cases, judgments may be executed up to twenty years from the date granted, i.e., after you build your empire.
- Separation of Performance Issues. (Using the analogy of people) If Joe becomes ill and can’t function for a while, that does not effect Larry’s ability to function. Similarly, such is the case with two LLC’s. That is, if one LLC cannot operate for some reason, the other continues to have the opportunity operate. If Joe needs to file bankruptcy or defaults on a lease or contract for some reason, neither Joe’s bankruptcy nor Joe’s defaults would effect Larry. The same would apply with separate LLCs. That is, the bankruptcy or default of one LLC, generally would not affect the other LLC.
The opposite could also be true. If there is only one LLC for both activities and one activity fails for some reason (e.g. bad timing, economy, mistake), the one LLC may fail, even if one activity was revenue producing – the debt accumulated by the other activity could take down the entire dual-activity LLC.
Also note, unlike corporations, there are NOT a lot of formalities required with LLC’s. Thus, if you have two LLC’s you may NOT need to think about being required to have two annual meetings (one for each LLC), keeping minutes of meetings of each LLC, etc.
In addition, in the tax arena generally, if there is only one owner of each of the LLC’s, the LLCs may be disregarded entities for tax purposes and thus you may not be required to file a separate tax return for either LLC (this would need to be confirmed with your tax professional with regard to your particular situation).
- Some issues that you may find to be disadvantageous to having two entities (rather than one) are as follows:
Some formalities that you will need to do for both both LLC’s are generally, as follows: (i) file two Annual Reports once a year; (ii) maintain two separate bank accounts (and no co-mingling of funds); (iii) one LLC should not control or give the appearance of controlling the other LLC; (iv) clearly indicate separateness of the LLC’s and clearly represent allocation of responsibility for the business activity to the appropriate LLC, in marketing, etc.; and (v) otherwise treating each as a separate legal entity.
With regard to “treating” the LLC’s as separate entities, if you think of it like two separate persons it may be helpful. For example, if you were entrusted with asset management for Joe and Larry, you would not pay “Joe’s” expenses out of “Larry’s” bank account — likewise, you would not pay ABC, LLC’s expenses out of XYZ, LLC’s account. Also, if part of the plan is that the income of one revenue producing business activity will assist with the expenses of the other business purpose (for example, ABC, LLC revenue helps XYZ, LLC until the XYZ, LLC grows into a revenue producing business), there are ways to make this happen, while allowing for independence of the two LLC’s. However, note, if it is not done properly you will risk not destruction of separation of liability.
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Copyright (c) 2011-2012 Michelle L. Grenier, Esq. All rights reserved.
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