My wife and I have a couple of small DBA (doing business as) retail ventures, one selling pet products and the other jewelry. The scale is small, and we treat each venture and each Web site as a distinct entity under the umbrella of one DBA name. Should we form an umbrella LLC to help protect us? We'd like to avoid the extra time, expense, and hassle factor of two LLCs, especially since we use a single state sales tax ID, and share resources and assets, including a bank account.—K.D., Manatee County, Fla.
Although your companies are both selling products retail, jewelry and pets are not closely related enough (unless you're selling diamond dog collars) to justifiably fall under one umbrella entity.
For instance, there's not much liability in the jewelry business unless you lose or damage rings and necklaces you take in for repairs, says Mike Greenwald, partner in charge of tax services at accounting firm Marcum in New York . But there is considerable risk of liability in the pet products business, particularly if you're selling food, supplements, medicines, or anything else that could potentially harm an animal.
"I tell my clients that if they're running multiple businesses, or they own multiple properties, they should try to separate them for liability purposes," Greenwald says. "If you're going to start a business and you're serious about wanting to make it successful, why not put all the pieces in place up front, when it's easy?"
Think Ahead to a Possible Sale
You can create a single-member limited liability company very inexpensively online, or for a little more through an attorney, and have very little added expense or hassle beyond the initial set-up, Greenwald says. "An LLC is not like a corporation where you have to file annual minutes and do ongoing accounting," he says. "It's a disregarded entity for tax purposes, so you can spend a couple hundred bucks establishing the entity and then continue on operating your business in whatever form you were operating it before."
The advantage to establishing separate LLCs goes beyond isolating liability and protecting your personal assets. "If you want to sell the business, you've got a legal entity to market and you've got a separate balance sheet. That gives you a better track record if you want to borrow money and puts you on a more business-like footing," Greenwald says.
When you establish the LLCs, you should also get separate bank accounts. "You're running into a very distinct disadvantage by co-mingling funds in one account, particularly if you one of the entities really takes off and you want to expand, obtain financing, or someday want to sell," Greenwald says. "It will be hard to demonstrate to a bank or buyer what the distinct operations of the companies are. It's much easier to separate them now than it will be when they've grown and gotten 10 or 15 years of operating history."
Talk to your accountant, lawyer, or mentor about your plans. It's likely they will tell you to go to the effort of setting up your companies properly now when the cost is relatively small and you need to establish a proper foundation. "Doing it the right way won't bog you down to the extent you think it might," Greenwald says.
Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.