Single LLC, multiple divisions, each with its own intellectual property

[Paydirt]

Say one forms an LLC and runs several different lines of business under it, each with its own trade name and intellectual property (e.g. software). How hard would it be to spin off a line of business as a separate entity in the future? How would one distinguish which IP belongs to which division to transfer it to the new entity?

I'm trying to figure out whether it would be practical to operate that way, which would save me the additional expense and hassle of having 3 LLCs instead. It's not critical for each of these lines of business to be insulated from the liabilities of the others and I'll be the only owner / member / manager.

[KyleXY]

If they operate under a single LLC, they are prone to have shared liabilities potentially. It would be cleaner to operate as separate LLCs although in some cases this may mean extra fees. Having said that, you can technically do it your way (although I wouldn't recommend doing it and you should consult an attorney directly). You can set up legal contracts to dictate what gets developed to belong to which entity but again, if they're all under one LLC and you just have a bunch of DBA, technically it's owned by the same entity and chances are you would be selling off the assets of that LLC when you form the new LLC to move the DBA over to. It will probably cost you more in the long run to undo everything than it's worth it to save you the money up front. This of course may not be entirely accurate and you should consult an attorney instead.

With that, I honestly don't get the point of trying to run three businesses at the same time. That often rarely works out well.

[Paydirt]

Thanks for your reply.

If they operate under a single LLC, they are prone to have shared liabilities potentially.

As I mentioned, it's not critical for each of these lines of business to be insulated from the liabilities of the others, so I'm not too worried about that.

It would be cleaner to operate as separate LLCs although in some cases this may mean extra fees.

That's what I was thinking originally, but I met with some counselors at SCORE and they recommended that I avoid the extra expense and hassle of starting several LLCs, and instead convert my current sole proprietorship to an LLC and start the new businesses under that entity. We didn't really talk about the intellectual property issues I asked about here though.

Each LLC would be an additional $100 per year in state fees and an accountant I talked to said each LLC would add at least $100 to the cost of tax return preparation.

The things you're alluding to are what I'm worried about: that if I do run these several businesses under one LLC the intellectual property situation will be a mess and it will be a big hassle to untangle later if I want to spin a division off into a separate entity.

With that, I honestly don't get the point of trying to run three businesses at the same time. That often rarely works out well.

I don't know what to tell you about that, that would be a whole other discussion.

[KyleXY]

I wouldn't say it's a huge hassle. I mean in some ways it is but not as huge as huge sounds (if that makes sense). It's just a lot of work and potentially a lot of legal fees to get things untangled if that is what you want to do. SCORE in my opinion isn't a good place for advice in all areas. They are more like a one size fit all solution most of the time and not all business fits into the advice they provide. However I will tell you one thing, most attorneys will probably give a similar advice early on. Most people try to save the entrepreneur from spending to much money getting the business off the ground before any revenue is produced within reason rather than try to always structure things perfectly in the beginning and in most cases, this makes sense since not every entrepreneur is loaded starting out to be able to afford the excess fees of structuring things a certain way.

All I can say is, I don't know enough about why you're doing this (and I'm not going to ask) nor do I know much about your business model to say what is best at this point. It's ultimately up to you to decide if the up front savings is worth later costs to separate them if it comes to that rather than operate it as a single business.

[Paydirt]

It's just a lot of work and potentially a lot of legal fees to get things untangled if that is what you want to do.

Well, that sounds like a pretty big hassle and expense. Can you elaborate at all on what work it would entail?

SCORE in my opinion isn't a good place for advice in all areas. They are more like a one size fit all solution most of the time and not all business fits into the advice they provide.

Yeah, I know what you mean, I got that impression. The counselors will tell you this and that, but I think their ability to advise is limited to pretty simple, common situations, and then they'd have to tell you to talk to a CPA or attorney anyway. But they were helpful, like tipping me off that having multiple single-member LLCs would inflate tax prep expenses, which I hadn't realized.

Most people try to save the entrepreneur from spending to much money getting the business off the ground...since not every entrepreneur is loaded starting out

Yeah, I'm on a shoestring budget at this point. I'd like to avoid doing things that are going to cause me big headaches later which is why I'm asking questions like what I posted here, but I can't afford to invest a lot of cash at this point. I may have to wing things a little bit if I'm going to get these businesses off the ground at all.

It's ultimately up to you to decide if the up front savings is worth later costs to separate them if it comes to that rather than operate it as a single business.

I think that depends how much the later costs would be. I'd like to get an idea of how expensive and difficult it would be to separate things later so that I can decide if the extra expense of several LLCs now is worth it.

If it wouldn't be that bad to separate things later, I'd love to avoid the extra expense of having multiple LLCs now. Depending how much of a pain it would be to separate things later, it might make more sense to run everything under one LLC and do what's necessary to separate things later if the businesses actually make any money and if there's a reason to separate them.

[KyleXY]

I can't give you the precise estimates on the cost of undoing something. It will vary GREATLY depending on numerous factors. This includes any legal fees you may require for this to be done accurately. Let's just say in a previous experience, we spent over 6 figures making a correction. The case was different than the one you presented here and again, I can't identify all the things that may need to be done because it'll vary on a lot of things but it's a very costly thing to go through.

[Paydirt]

I appreciate your feedback, but it's hard to tell how much the unfortunate situation that caused you so much trouble resembles the situation I'm contemplating, if at all.

I'm starting to think I'm either going to have to wing it and take my chances, or swallow the expense of talking to a lawyer.

By the way, sorry to hear about your trouble.

[KyleXY]

It's not the same situation. But that wasn't the point I was trying to make. It doesn't have to be a complicated process for something to cost a lot of money. For us, we had to reincorporate our home corp in a different state. That change alone and all that was involved was a very costly move. You don't need to apologize as it was a good learning experience and ultimately it ended up better for us. However having said that, your situation may be different. I'd at least recommend consulting an attorney for their best advice in your particular situation and more importantly, how it affects your particular business model.

[Paydirt]

I'm impressed that your business is on the level where you can look at a six figure expense as a good learning experience -- I'm nowhere near there. I've contacted some attorneys to see what it may cost me to get their advice on the question I posed here. I don't want to make a big mistake that's going to make things really hard for me later if the businesses actually succeed. I can maybe bite the bullet for 1/2 to 1 hour of an attorney's time, but if it would take more than that I'll have to wing it if I'm going to get these businesses off the ground at all.

Thanks for your help.