Another Entity or Add a DBA?

Many times to be successful in business today you are involved in 2-3 different business activities to develop multiple streams of income. Perhaps your business has been successful and growing over the past several years and it is time to evaluate whether you need another entity or should you simply file a DBA (doing business as) attached to your primary entity.

Here are some common situations and different recommendations to consider. You may also want to run this past your CPA or attorney who understands your big picture.

1. You are just starting your home based business and are operating a direct sales opportunity online from home and you are involved in 2-3 different affiliate products. Should all of that be operated through the same LLC (or corporation) or should you have one entity for the direct sales opportunity and one for the affiliate opportunities?  Most likely if you are starting both endeavors at the same time it would be ok for both to be run through the same entity. Typically an affiliate opportunity should not cause much liability to your direct sales opportunity. Check in after 6 months, if both are extremely profitable and successful you may want to consider a separate entity. For most of you one entity would be fine in this case. There is nothing to change on the articles of an LLC for this. Typically, if a corporation, it should state on the articles to engage in any legal business which gives you the flexibility to operate more than one business. The exception would be if you own real estate outside of your residence. If you own a rental properly that would not go into the same entity as your direct sales opportunity. The real estate will bring unnecessary risk to the direct sales opportunity which should be a low overhead and high profit type business. Plus if you buy real estate in the future typically you want a flow through entity for the direct sales business like an LLC taxed as an S corporation so you can pay taxes once and then close on a piece of real estate in your own name personally and after the closing transfer it into a brand new LLC.
2. You have an entity with a partner (other than your spouse) and you are going to have an affiliate program or start a side internet business. The big problem of filing a DBA linked to your entity in this case is that you already have a partner. Let’s say it is a 50/50 business. If you point the internet business to the existing entity your partner would get 50% of the profits. Assuming your partner has nothing to do with the internet business this makes no sense. In this case you would form a separate legal entity for your internet or affiliate business to separate it from the entity you operate with your partner. Exception, if your partner is involved in the internet or affiliate opportunity and you are putting in the same effort in the short term it may be ok to have a DBA linked to the entity. Key point: What I mean when I say the DBA is linked to the entity that means that the entity is the applicant for the DBA. If you are the applicant for the DBA you created a sole proprietorship with unlimited liability! I see this often especially when one had a DBA as a sole proprietorship before they formed the LLC and later forgot to “re-link” the DBA to the new entity. Which basically means you have to close out the DBA linked to you and the same day refile it linked to the entity. This is very important!
3. You have had an entity for 8 years and your primary business is very profitable and successful. Now you want to start a new business that has more risk to it, like a restaurant. Of course, I know you are thinking, who would ever start a restaurant especially in this economy, and I agree with you, but it is just an example. You would not want the new business, the restaurant, to cause unnecessary liability to your existing business that is a cash cow! Therefore invest in the money to separate out the two businesses!
4. You have a successful business and now are going to add a partner with a new business. If the partner is not involved in the existing business, form a new entity.
   
5. You have an old entity from a previous business with an old partner. Now you have a new business with a new partner. Form a new entity! Do not be cheap and risk using the old entity and make a lot of money with the new partner and later on find out the first partner never was properly removed from the company. Many people forget that at renewal time and they update officers or managers that we are an extension of the Nevada Secretary of State and when it comes to update the list of officers for the Nevada Secretary of State that is very different then did your previous director or present properly resign. This happens too often and can come back to haunt you down the road.
6. You have a new business with several different products and you are not sure which one will take off. This is probably ok to start with one entity and several different DBAs linked to that one entity. The big mistake we see is that four years later after two or three of them are successful, many people risk four year of business by not wanting to form a separate entity or two because they want to keep things “simple”.

Remember “simple” and asset protection are inversely related. The least protection, the most exposure, the more likely you will and lose everything and have to start all over.