J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Advantages and Disadvantages of Multiple Entities

Some activities can naturally and logically exist within a single entity. For example, a beauty salon can provide grooming services and sell beauty products using a single business. This makes sense. This can be done, for example, using a single entity or a holding company, with different activities run by different divisions, each with its own name.

For other situations, however, conducting different activities through separate entities makes more sense. Here are some pros and cons to using multiple entities.

Legal Reasons

There are usually no legal bars under state law to operating different activities within a single business. But separate entities are a way to create the utmost liability protection. Typically, building owners form separate LLCs or corporations for each property. In this case, it is not the owner’s personal liability that is being protected in case of lawsuits, but rather the assets of the properties on which the liability did not arise. For instance, say an individual owns 2 small motels. If there is a legal action against 1 motel, the other can be at risk unless each is a separate legal entity.

Business Reasons

Administratively it may be easier and less costly to run a single entity, but the activities may not be suitable to be joined in a single business. For example, say a computer consultant operating as a 1-member LLC also has an active eBay business. From a marketing perspective, it does not make good ...