Questions on how to set up a "parent" company with subsidiaries.

[Monte]

Hi All.

I'm in Texas, and I'm thinking about setting up a small business, and the business structure there, too.

What I'm curious about setting up is the following (and how to set it up).

What I would like to do is set up a "parent" company as an LLC (say, Monte Enterprises, LLC), and then set up some other smaller businesses as DBA/Fictitious Name/Assumed name/LLCs, and tie them to the parent company. For instance, if I set up ABC Consulting, I'd like it to be a subsidiary (or "owned by") of my "parent" company. Think "Yum! Brands" or something like that.

So I'd like the structure to look something like this:

Monte Enterprises, LLC

ABC Consulting
DEF Company
etc.


How would I actually go about doing this, and what are the tax and legal implications?

Especially if the "subsidiary" companies are DBA/Fictitious Name companies?

Does anyone have any insight into this?

[tallen]

Do you want each subsidiary to have liability protection from the obligations of the others? With just a "DBA" arrangement, liabilities of the individual subsidiaries would pass through to the parent company. To improve the isolation of liabilities, it might be better to set up individual LLC's (or corporations) for each subsidiary, where the parent LLC (or corporation) would be the named member/shareholder of each of the subsidiaries. This provides "double insulation" for your own assets (assuming you don't pierce any corporate veils).

In terms of income and taxes, at least at the federal level, as I understand it:
- if each of the subsidiaries is a C-corp (but wholly owned by a parent company), each individual corp would file it's own tax return and pay taxes on its income; any dividends would go to the parent company.
- if each of the subsidiaries is an S-corp (wholly owned by the parent company), each individual corp would file it's own tax return, but the income would be "passed through" to the parent company (reported on a schedule K-1)
- if each of the subsidiaries is an LLC (wholly owned by the parent company), each individual company would pass it's income (revenue and expenses) through to the parent company (if the LLC's have elected S-corp treatment, then see above).
- if each of the subsidiaries is a DBA, they are not actually independent of the parent company, and their income (revenue and expenses) would belong to the parent company

What the parent company does with the above depends on how it is organized:
- if the parent company is a c-corp, it would file a tax return reporting dividends or other income received from its subsidiaries, and pay tax accordingly.
- if the parent company is an s-corp, it would file a tax return, but the income would be "passed through" to you (via Schedule K-1), who would report it on your own 1040 and pay taxes on it accordingly
- if the parent company is an LLC (with you as the single member), you would report the income (revenue and expenses) from your subsidiaries on a schedule C with your own 1040 and pay taxes accordingly (unless the LLC has elected S-corp treatment, then see above).

As to HOW to do it, I would first form the parent company (LLC or whatever), and then have the parent company form the subsidiary entities (or register the DBA's).

I am not a lawyer or accountant, and you are advised to seek appropriate professional advice, especially if there are significant assets involved that you want to protect from liabilities.

[Monte]

Hi tallen.

Thanks for your post. As far as your first question goes, that's something I'm still thinking about. LLCs in Texas cost $300 to form, which could get rather pricey if I have three or four subsidiaries. DBAs are about $25, if I'm not mistaken. I know I want the parent company to be a Single Member LLC. And I think it might be easier (though I don't know) based on what you're saying to set up a "parent" LLC, because if the other companies (DBAs) are owned by the LLC (and, by definition, me since I own the LLC), that would make taxation easier, and I only have to set up one business account. Unless I would only have to set up one business bank account anyway.

[tallen]

What are the different lines of business that you potentially want to get into? What are the exposures to risk (or potential for incurring liabilities) associated with each?

Otherwise, it sounds like the one LLC parent company along with whatever DBA names you need would probably be the way to go. One bank account, one tax return, etc...

[Monte]

Well, I work in the software industry, so writing software might be one of them (or at least, some sort of IT consulting).

I've also thought of maybe doing some woodworking and leathercrafting. Stuff like that.

[tallen]

I would think a single LLC "holding company" and some DBA's for your different lines of business should work. Of course, you would want to make sure that your commercial insurance company is aware of the different lines of business.

With my wife's sole proprietorship, working out of our home, she has her commercial insurance with the same insurance company that we have our home, auto, and umbrella policies with, so if a claim should arise there is no question about which company should cover it.

I still think it would be a good idea to meet with an attorney and/or an accountant (not necessarily together) to get some professional advice on how to set everything up, and then sit down with your insurance agent, too.

[Monte]

I'm definitely going to consult with an attorney/accountant. But you've given me some good insight and some things to consider and questions to ask.