Serial entrepreneurs often explore multiple business opportunities simultaneously. Did you know that you may not need a whole new LLC to start a new line of business? You can use your current LLC and maintain different lines of business under one entity. This practice is often referred to as forming an Umbrella LLC structure.
Using an Umbrella LLC for multiple business lines does have its advantages. However, it is not a one-size-fits all solution for all entrepreneurs. There are several factors to consider before deciding whether an Umbrella LLC is right for your business. You may come to realize that there is a better option.
Consider the following when deciding on whether to use multiple entities for your business:
Umbrella LLC Advantages:
- The business entity is already created;
- Lower overhead costs (one annual fee instead of multiple);
- Less oversight is required to keep assets separate since they are held within the same company;
- Having multiple “incubators” for business lines can accelerate innovation, experimentation, and growth through diversification;
- Better suited for activities that are low risk and well insured.
Umbrella LLC Disadvantages:
- Possibility of cross-collateralizing liabilities when mixing business lines through poor record keeping;
- Having all eggs in one basket means you must watch it carefully;
- Often requires multiple Trade Name filings to open new bank accounts (AKA DBAs “Doing Business As”).
Should I Form an Umbrella LLC?
An Umbrella LLC refers to a structure where one parent LLC has ownership of several other LLCs that are below it called “subsidiaries”. The parent LLC is often referred to as a “holding company”. A holding company typically does not conduct business operations. Rather, the company exists solely to manage and consolidate ownership amongst the subsidiaries.
Forming an Umbrella LLC may be suitable for you if:
- Your businesses only hold assets involving little to no risk;
- You benefit from lower startup and annual costs;
- And you are able to maintain separate records for each business.
“An Umbrella LLC is not a one-size-fits all solution for all entrepreneurs.”
Balancing the needs of your bottom line with protecting your company’s individual assets often comes down to personal risk tolerance and a cost-benefit analysis. Instead of generating multiple lines of business under one LLC, many business owners prefer to have separate LLCs to better protect their business assets.
Separate LLCs provide for a much cleaner break between individual lines of business. This clustering strategy gives you a stronger protection against potential creditors, preventing one creditor from accessing the assets of other unrelated companies. Instead, a creditor of one LLC can only access the assets of the company in which they have an interest.
While having multiple LLCs comes with additional overhead costs (such as the Annual franchise tax fees for each LLC), the strategy can be invaluable if the liability protections prevent one troubled business from sinking the entire enterprise. It is also easier to spin-off or sell a business held within its own entity.
Consider The Series LLC
If you are inclined to keep multiple lines of business under a single LLC due to the costs, you may consider the Delaware Series LLC . The Series LLC is a hybrid approach that allows one juridical entity to establish an unlimited number of protected series. The Series LLC law considers protected series to be legal persons, meaning they have their own asset protection shield.
While the asset protection shield between protected series is not as predictable as separate LLC’s, the cost savings are significant. Forming a Series LLC requires making just on public filing and paying one filing fee. In Delaware, a Series LLC is only required to make on annual franchise tax payment.
The series LLC is often an idea worth considering for low-risk, well-insured assets, like residential rental units. Series LLCs can even be used by serial entrepreneurs needing to incubate several business ideas with the ability to spin-off successful ones into free standing businesses later. Whether you decide to form one LLC, multiple LLCs, or a Series LLC, your Registered Agent can help you get started.