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Exploring the Pros and Cons: Should Businesses with Multiple Locations Have Separate LLCs?
The business landscape is ever-evolving, with companies constantly seeking ways to optimize their operations, minimize risks, and enhance their growth potential. One key decision that business owners with multiple locations often face is whether to establish separate Limited Liability Companies (LLCs) for each location or maintain a single LLC encompassing all locations. This article delves into the advantages and disadvantages of both approaches to help business owners make an informed decision.
The Case for Separate LLCs
- Liability Isolation: Creating individual LLCs for each location can provide a degree of liability protection. In this scenario, the debts, liabilities, and legal issues of one location are generally kept separate from those of other locations. This means that if a legal claim arises at one location, the other locations’ assets and operations remain shielded.
- Local Autonomy: Separate LLCs can grant each location a certain level of autonomy in decision-making. This is particularly beneficial if different locations cater to diverse markets or have unique operational needs. Local management can respond more effectively to regional trends and demands without being constrained by centralized decision-making.
- Investment and Funding Opportunities: Establishing separate LLCs can facilitate targeted investment and financing strategies for each location. Investors or lenders might find it more appealing to invest in a specific location with its own financial records and performance metrics, potentially leading to better terms and conditions for obtaining funding.
- Tax Flexibility: In some cases, separate LLCs could offer tax advantages. Depending on the tax laws of the jurisdiction, individual LLCs may be able to take advantage of specific deductions, credits, or incentives available to businesses operating in that location.
The Case for a Single LLC
- Simplified Management: Operating under a single LLC can streamline administrative tasks, making it easier to manage finances, compliance, and legal matters. Centralized management can promote consistency in branding, policies, and procedures across all locations.
- Cost Savings: Managing multiple LLCs involves additional administrative costs, such as registering each entity, maintaining separate accounting records, and filing multiple tax returns. Consolidating these tasks under a single entity can potentially lead to cost savings.
- Brand Cohesion: A unified brand identity across all locations can be easier to establish and maintain under a single LLC. Customers can recognize and trust the brand regardless of the specific location they visit, enhancing overall brand equity.
- Resource Sharing: Operating as a single entity allows for more efficient resource allocation between locations. Equipment, staff, and other resources can be shared or transferred as needed, optimizing operations and reducing redundant costs.
Deciding whether businesses with multiple locations should have separate LLCs is a complex choice that requires careful consideration of the unique circumstances and goals of the business. Both options have their merits and drawbacks, so it’s important for business owners to weigh the benefits of liability protection, local autonomy, and tax flexibility against the advantages of simplified management, cost savings, and brand cohesion.
Ultimately, the decision should align with the business’s long-term strategy, risk tolerance, and growth ambitions. Seeking professional advice from legal, financial, and tax experts can be instrumental in making an informed choice that maximizes the benefits and minimizes the potential downsides of either approach.
When Should Businesses With Multiple Locations Have Separate LLCs?
This is the overarching question. Let me give you more detail about what was presented.
For companies with multiple locations, is it better to have each location be a separate LLC for both the business and the real estate? We currently have it like that, but we are finding some downsides. For example, separate legal entities are treated separately by health insurance companies. So each entity needs to satisfy the minimum number of participants to offer benefits at each location. If this offers the best legal protection, then is there a way to collectively use a holding company until the business reaches a scale where a C Corp makes sense, or is there a better approach?
The Competing Goals: Simplicity vs. Limited Liability
This is a great question because it highlights business owners’ competing goals. On one hand, your goal is to have simplicity. You want to keep it simple. You don’t want to have a bunch of entities and have all the transactions between them and keep track of which employees are working for which ones.
You also prefer to maximize economies of scale. For example, when you go to get health insurance for your employees, you would like to have one policy for all of them, not having to have two policies. Or, for example, let’s say you could get a bulk discount from a particular company. You would like to maximize that by having all employees included, not having to parse it out between the different companies. On the other hand, your goal is to have limited liability. So the impact of one business doesn’t affect the other business. In other words, if one gets sued for millions of dollars, the other one isn’t at risk.
So what do we do about this? By the way, too, I am also very cautious about over-lawyering things because lawyers might suggest a technically precise answer that in business doesn’t work out well. And that is why it is really helpful to have attorneys who represent you, who understand not just the technicalities of the law, but also how business works.
Assessing Risk and Insurance
I think I would first see whether it is possible to have everything under one entity and get an insurance policy that would cover all the risks that you are concerned about.
But here is the problem with that idea. There are going to be some risks that insurance won’t protect against, like breach of contract. If you breach a contract, you are typically not going to have an insurance company that will cover that. Why won’t they cover it? Because if you can just breach contracts without any consequence because the insurance company is going to pay the bill, you would be incentivized to breach contracts all day. So insurance companies won’t cover that.
Exploring Insurance Solutions
First, what I would do is look at the specific business and figure out what the real risks are that we are talking about here. If it is the type of business that has a risk of getting sued for employment practices like wrongful termination, discrimination, and things like that, you can get employment practices liability insurance. So that is a great option. If it is a business that is putting products into the stream of commerce, like a manufacturer, wholesaler, distributor, or retailer, then you are looking at product liability lawsuit risk. But you can get insurance against that.
You can get general liability insurance for your company. So if people slip and fall or have injuries, things like that, you can get workers comp, and in fact, you are generally required to get workers’ compensation insurance so that if workers are injured, that gets covered. So I think I would look carefully at the business and say, all right, is there a way to insure against the risk and put everything together? If there is, often that can be the simplest approach because now you have taken care of the limited liability issue and you can just think about managing everything else within a single entity.
Structuring Entities and Dividing Risk
The next step, though, is moving assets out of the entity. So you have a holding company and you have an operating entity. And the holding company owns all the real estate and the equipment and things like that. The operating company engages in all the activities. It has the employees, has the contract, serves the customers, etc. And then there is a contract between the two so that the assets of the holding company can be used by the operating company. So that is another way to divide this. Instead of dividing it by location, you move the expensive assets into a holding company and you have the riskier operational activity in an operating company. Typically, the holding company is going to be an LLC, and the operating company could be an LLC or an S corporation. The one advantage of an S corporation is you can reduce some taxes in certain situations (payroll tax or self-employment tax).
Considering Company Size and Structure
Depending on the size of the company, if this is a very large company, it likely does make sense to have separate entities for what would otherwise be called divisions of the company. Maybe it is separate locations or something like that. You know, a 5,000-employee company, certainly, that could make sense to separate out some of the entities, especially since they often have their own P&L (profit and loss) anyway. It essentially means when business leaders are trying to assess how divisions of a company are doing, they often have each division create its own profit and loss statement. So the business owners or leaders of the company have the ability to see how that division is doing financially, separate from the other divisions.
So if you have separate P&Ls for divisions, then you may be at the size where it is worth having a separate entity for each division. So, unfortunately, I didn’t give you a clear yes or no, but I have instead walked you through the process so that you can avoid liability as much as possible while ensuring some simplicity, minimizing over-lawyering, and trying to maximize your buying power when getting health insurance for employees or fulfilling those minimum employee requirements when getting health insurance.
There is an old joke that attorneys rarely say yes or no. They always say it depends. And this is one of those situations where it really depends on the circumstances, and you would be best served by working with an attorney in your state who can take the time to answer the questions that I just raised here or the topics and factors that I just raised, talk through those with you based on your situation and help you figure out what is ideally best for you.
All right. If you haven’t already subscribed at aaronhall.com/free, you are welcome to check out our channel where we have all sorts of other questions from business owners and the answers provided to you. I do these videos as a public service, as a way to use my knowledge as a licensed attorney to help business owners avoid problems, spot issues to discuss with their attorneys, and improve the likelihood that you will have a successful company and successful life. It is great being here with you today.