Many business owners find that once they start one business, it opens the door to many other business opportunities within that market. For example, a successful residential construction company might find that it would be profitable to open their own real estate agency. They already know the real estate construction business inside and out, so why not get in the market of buying and selling real estate as well?
This brings up the question of whether the business owner should form a new limited liability company (LLC) for each new endeavor. For the reasons explained below, the answer is generally yes, a business owner should maintain a separate LLC for each distinct business. While this is not an exhaustive list, it provides a picture of some of the issues that may arise in this type of situation.
Protections Provided by LLC
It is helpful to review why LLCs are beneficial in the first place. Under Pennsylvania Law, the members of an LLC (owners of an LLC are called “members”) have limited personal liability protection for the debts and obligations of the LLC and any negligent acts of the other members. A member’s liability is limited to the amount of his or her own investment in the LLC and their own personal assets are protected beyond that amount.
One Business is Protected from the Other
If the business owner keeps each business venture separate and does not comingle business assets, the business owner and their other businesses will benefit from the same LLC protections. If each business has its own LLC, enters into its own contracts, and keeps its own financial records and bank accounts, the other businesses will not be responsible for the debts or judgments of any other company. This is particularly valuable when an owner wants to dive into an area that they are less familiar with. The more successful business will not be at risk if the start up fails.
Insurance Considerations
A business providing services outside its insurance coverage may risk having a claim denied. Insurance coverage is unique to each business. Insurance coverage is intended to protect against the risks that are present for that particular line of work. If a business begins providing services that are outside that line of work, there is a chance their insurance coverage will not apply to accidents or claims for the new business services. Forming a new LLC and getting insurance for that line of work will reduce the chance that a claim will be denied.
Complying with State and/or Federal Law
In Pennsylvania, certain professional services require special state or specialty board approval before it may open for business. Professional services such as engineers, lawyers, accountants, realtors, and medical providers are required to give the State notice that they intend to offer their services to the public. Registering a separate LLC for each business lowers the risk that the State will step in at a later date and require additional approvals or question the business’s activities.
Is it too Late if I Already Started Providing New Services?
Don’t worry if you already started a new business without registering a separate LLC – it’s not too late! Our firm can help you form a new LLC and ensure all the appropriate assets are transferred to the new company. In order to determine the best plan based on your circumstances, contact us early in the process to properly evaluate your options.