In this video, you get answers to these questions:
- What is a DBA?
- What are the benefits of a second LLC?
- What are the disadvantages of a second LLC?
- What are the alternatives to creating a second LLC?
- When can one LLC be liable for the other?
- How can I learn more about this topic?
- Can I use the same EIN for both LLCs?
- What are the next steps I should take with my attorney?
Should you create a second LLC or use a DBA? That’s the question I’m answering today. One of our subscribers asked a question. He said, “I’m looking at expanding into a new area. It’s an area unrelated to my first business. Should I create a second LLC for that new business or use a DBA?” Well, first off, congratulations. It’s a great problem to have. That the first business is going well. You’re a serial entrepreneur. You’re looking at launching a second business. Let’s talk through some of the issues that arise when determining, is it better to use a DBA or create a whole new business entity? Now, I’m going to use LLC here for purposes of the conversation, but this would equally apply to an S corporation or even a C corporation if that’s what you had.
I’m Aaron Hall, I’m a business attorney in Minnesota. I’ve answered a number of similar questions like, should my spouse and I own a LLC together? Would a sports and fitness trainer benefit from an LLC? And what’s the difference between an LLC, S corporation and sole proprietorship? Today, we’re talking about the specific scenario of you have a good business running, and you’re trying to decide, do I now open a second business entity or use a DBA? DBA stands for Doing Business As. So you might, for example, have John Smith Electronics doing business as Smitty Electronics or doing business as Smitty’s Pool Service or doing business as Smitty’s Camera Shop.
As you can see, a DBA is just essentially an alias or a nickname for an existing business. And every state has a process where you can set up a DBA, sometimes called an assumed name or an alias, so that you can legally use a different name for the same business entity. All right, what are the benefits of setting up a second business entity or a second LLC? First, you have separated the liability. So, if a problem happens in your first business, the second business isn’t liable. Or if a problem happens in your second business, the first business isn’t liable. You’ve separated out that liability. So, not only are you not personally liable as the owner for what happens in these companies, they’re not liable for each other.
I’ll give you a common example. Many times people will set up a separate LLC for each rental property, because if something happens with one, they don’t want to risk losing both rental properties. That’s a simple example. So, that’s the benefit of setting up a separate LLC. You isolate the liability to the entity where the problem happened and the other business isn’t exposed to that liability. What are the disadvantages of a second LLC? Well, first off, you’re going to have separate accounting for both of those LLCs. You’ll have separate payroll, maybe a separate payroll company. You’ll have to do separate tax returns. It’s just a pain to have to keep the formalities, if you will, of having a second LLC. So, there are costs associated with that, CPA costs, probably attorney’s costs. So that’s the big difference there. It’s just another LLC or corporation to maintain.
What are the alternatives to a second LLC? Well, we talked about one in the beginning. You could do a DBA or an assumed name. The problem with that again, is that the liabilities are all in the same entity. So, if one business has a problem, both businesses can go down because they’re all in the same entity, even though they have separate names or separate aliases, separate DBAs. Another option is to keep them all in the same entity, use DBAs, but get insurance to limit your liability. So, for example, you might get a million dollar insurance policy that covers significant number of the lawsuits or risks that you might encounter. So, insurance is a way to minimize risk rather than setting up a separate LLC.
Another alternative to a second LLC, is available in some states, it’s called a serial LLC. A serial LLC is an LLC that is set up under a specific state statute that allows you to have as many LLCs underneath it. So you have one LLC, but then you essentially have to keep separate records for each LLC within it. Technically they’re not many LLCs, they’re just a part of that serial LLC. So you have a parent serial LLC, and then each division or each segment of that LLC has isolation from the liability of the others. It’s like having two or three or 10 LLCs, but you’re not having to pay the costs and have totally separate LLCs.
Let’s talk about, when can one LLC be liable to another LLC? By the way, this again applies to S corporations or C corporations. The general rule is, it’s when they co-mingle assets. That’s the biggest issue. Basically, you’re having everything going to the same bank account. You’re keeping the books and records for both LLCs in the same QuickBooks file, you’re buying things and selling things, you’re treating it like one company even though they have two separate names. Often courts will say, “Look, one LLC is the alter ego of another.” You’re not distinguishing between the differences in the two LLCs; the court’s not going to either. And that means that, if there is a lawsuit against one LLC, the plaintiff who initiated the lawsuit, the party who sued your business, may be able to pierce the veil and go after the second LLC.
To learn more, you can check out my video on Piercing The Corporate Veil or Piercing The LLC Veil. It’s an important legal doctrine that talks about when entities can be liable for each other. Can I use the same EIN number for both LLCs? No. So, let’s break that apart. EIN stands for Employer Identification Number. It is the tax ID number that’s given to a business. You as an individual, as a citizen of the United States, you have a tax ID number. We call it Social Security Number. But businesses don’t have social security numbers, they have a different type of tax ID, an EIN, Employer Identification Number. That is how the IRS tracks all of your bank accounts, your tax liability and all that. You need to use a separate EIN for each business that you have. So if you have two LLCs, you get two EINs. They’re free. You set them up with the IRS. You want the IRS to be distinguishing between the two businesses.
All right. So, we talked about the benefits of a second LLC, isolating liability. We talked about the disadvantages of a second LLC. You have to treat that as a separate business, separate payroll, separate accounting. We talked about the alternatives of a second LLC, and that would be, an insurance policy, a DBA, perhaps a serial LLC if it’s permitted in your state. We talked about, when can an LLC be liable for another LLC? And that goes to the piercing the corporate veil doctrine. It’s basically when you co-mingle assets, that’s the big one. And then, can you use the same EIN for both LLCs? The answer is no. So if you’re a business owner, you’re successful, you have one business doing well. The next question to talk with your attorney about is, will the new business have risks that I don’t want to expose the old business to? If the answer is yes, set up a new LLC. Or will the old business have risks that I don’t want to expose the new business to? If the answer is yes, set up a new LLC. You want to be able to isolate the risks by having two separate LLCs.
So, if I were facing this issue, I would ask myself, how big are these businesses? Do they have substantial risk of getting sued? Maybe can I get an inexpensive insurance policy? Often business owners will say, “You know what? I’m going to run both businesses out of the same LLC for a while until the second one is really profitable. And then basically I’m going to close down that division of the old LLC and launch a new LLC.” That has to be done with care.
It’s important that we avoid what’s called successor liability. That’s where the new LLC looks like just an alter ego or a successor of the old entity. But you can do that with an attorney. And a lot of times business owners will start both businesses in the same entity, and then once both are really profitable, they’ll shoot it out into a new entity.
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