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Should I Form Separate Legal Entities for Different Lines of Business?

Sign for a forked road, symbolizing separate legal entitiesThis post discusses whether one should form separate legal entities (corporations or limited liability companies) for different lines of business.

I am writing this post because I have seen this type of question online many times. The most recent occurrence was on Avvo. See Should I set up a subdivision or have a LLC or corporation own another LLC?

Separate Legal Entities Protect Different Businesses

The most important reason to form separate legal entities is to ensure that failure of one business will not bring down another business.

Assume, for example, that one line of business incurs a serious financial liability, such as losing a major lawsuit. If if all lines of business operate under the same legal entity, then profits from the other lines of business will be taken to satisfy that liability.

However, if each line of business has its own legal entity, then profits from the other lines of business will be protected.

Obtaining Tax Advice and Liability Insurance

Before setting up business entities, one should consult with a qualified tax advisor. The most tax-efficient structure will depend on the expected financial performance of each business as well as the owner’s financial situation.

And once an entity is formed, it should carry liability insurance that is appropriate for the type of business that it is conducting. A commercial insurance broker can recommend appropriate coverage.

In summary, the combination of separate legal entities and appropriate liability insurance is the best way a business can protect multiple lines of business from one another.

Photo credit: iStock

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Business Entities, Tax