I recently saw a social media post that shared “The Use of DBAs instead of starting a new company is often the best way to diversify.
After working with hundreds of profitable small business owners, asset protection is a major priority in planning for sustainability and growth. I never like to use blanket answers when it comes to tax & business, because most all answers depend on your individual facts and circumstances. But I disagree with this statement, more than I agree.
First, is it possible to form 1 LLC and create multiple DBAs to separate different “business activities” within the business? Absolutely! It is also great to have insurance and in most businesses you are required to have some sort of insurance. However, insurance companies are businesses which mean their goal is to make a profit. Insurance companies have floors of attorneys to comb through your insurance agreement to identify why you claim is not covered. If they are successful, then what’s next? The opposing party’s attorney will look to your business assets. Therefore, reliance on insurance alone for your business’ asset protection without doing your part through your business structure, can have lasting effects on your business if ever sued.
Here are some things to think about when you are considering owning and operating new business activities under one LLC for brand consistency purposes or whatever reason.
The definition of diversify is to make diverse or composed of unlike elements. A question to ask yourself is, “If I am looking to diversify or add different products or services to my business, is it best to place all these activities under one house exposing each product/service to liability of the whole?”
Tip: Weigh the Risks and Similarities of each “business activity” to determine if a new entity should be created.
ACCOUNTING & BOOKS
It could seem easier to have all services products under 1 entity, but keeping expenses related to each DBA could be a nightmare. This could require you or your bookkeeper to enter each expense when incurred because going back to remember which business activity it applied to could be difficult.
It is your responsibility to keep accurate books and records. Accuracy would mean that you are able to identify expenses related to the business activity it relates to. And in case of an IRS audit, they will want to inspect your books and records.
The North American Industry Classification System (NAICS) is the standard used by Federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy.
On your tax return you must enter the NAICS numer of your business. A red flag could be raised which can increase your chance of an audit if you are operating several businesses under one entity, and you have expenses that are unrelated to or grossly in excess of the industry your NAICS number relates to. Remember, you can only enter one NAICS code for your business on your tax return.
If you are audited, properly identifying and substantiating your business expenses is likely to result in a positive audit decision, but who wants an audit!
Tip: Keep accurate books and records. The use of DBAs could increase the chance of an audit (especially if you are operating a LLC taxed on Schedule C ) because all expenses grouped together on each line of the Schedule C could raise a red flag. This is possible because the total of expenses on each line could exceed the industry standard based on the NAICS number used to identify your business.
MAINTENANCE FEES AND PAPERWORK
Creating new entities does require maintenance fees and paperwork. But these are 100% deductible as a business expense within reason. For example, you’ll need to pay to incorporate/form an LLC for each business, as well as any annual maintenance fees/forms to the state. You may need to file separate tax returns for each business, but there are ways to form your companies where only one (1 ) tax return will need to be filed for that family of companies.
For some entrepreneurs, all this separate paperwork can be a pain. But for others, the added fees are well worth it in order to protect each individual business from the others.
These are key considerations to be made; however, there are other considerations to be made.
Khris owns Kayoh Kuts, LLC a barbershop. A year later he opens:
1. A Detail shop, DBA Kayo Kleans,
2. A Lawn Care service, DBA Kayo Kuts Lawns and
3. Paid cash for 2 rental properties -Kayoh Kash Properties.
All 4 businesses are housed under this one LLC, Kayoh Kuts.
My recommendation in this scenario (assuming all other relevant facts). It is advisable that Khris organize separate LLCs because each business has its own distinct set of risks and they are just totally different businesses. Also, it is also never a good idea to own real estate in your business operating company!
The bottom line is there’s no legal limit to how many business ventures you can start and run. Just make sure that you properly account for your liability risks when structuring these ventures.
The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.