Introduction

Having multiple businesses can be a test of coordination as you bounce between the entities trying to make sure everything is in order and they are proceeding smoothly. When one business receives funds from another, that will affect the books on both of those businesses. Recording those transactions incorrectly could lead to ruining your understanding of how each respective business is doing and even possibly changing your overall tax standings.

In this article, we will discuss why you should separate your business transactions, how to keep track of transactions for multiple entities, how to set up intercompany transactions, and the different types of business structures for multiple entities.

Why Separate Business Expenses

At your first company, you could be having hundreds to hundreds of thousands of transactions running through your books every month as you purchase the necessities to keep everyday operations going. Making sure they are all categorized correctly can be a daunting task for a single company. Add a second entity to the mix and you almost immediately double your transactions and henceforth double the mess. As both businesses grow, you are going to start to wonder how each business compares to one another if they are similar companies. When you look at your books, you then notice you never separated the transactions, and now you aren’t sure if expenses are for one company or the other. You may be able to pull apart some of those transactions, but only having a glimpse of reality in the books is not enough to fully understand where your businesses are standing.

Another reason to split up your business transactions is for liability purposes. Let’s say both companies’ transactions are in a single bank account and are LLC’s, which provides liability separation from the other entity. Suddenly, you get an unfortunate lawsuit brought before one of your businesses. When the government looks at your finances and they see that everything has been combined into one account, they are not going to help you discover which transactions are for one company versus the other because they do not have the time. Instead, they are going to treat your transactions as one company instead of the two companies, negating the whole reason for getting an LLC in the first place. Books not being separated opens up both businesses to the liabilities of the other instead of diversifying your overall risk profile.

How to Keep Track

Making sure that the manifold expenses of your different businesses are kept separate can be trivialized with one simple trick: Open a different bank account and/or credit card for the other business! It really is that easy! The hard part is making sure to continue to use each of those accounts for the specific company they are for. That will remove 95% of your troubles when it comes to separating out transactions.

The other 5% of your troubles come from shared transactions. This could range from anything from a shared rental space to machinery used by both entities, and even a shared workforce. How to determine how much expense goes to which entity is a measure of company usage that needs to be tracked thoroughly and with care. This can be done in a few ways and depends on how your companies are structured, which is discussed later in the article. In the meantime, we will outline a few of the general ways to track intercompany transactions.

The first is to have the expenses go through one company and then create a due to/from asset/liability on both books to keep track of how much one company owes the other from the shared transactions. For example, let’s say you hold a marketing campaign that showcases both of your businesses. When you purchase the $1,000 ad space, you buy it through Company A’s card. Then, on Company A’s books, you would create a “Due from Company B” asset account for $500 that is offset by reducing your marketing expenses from $1,000 to $500. Then, on Company B’s books, you would create the “Due to” liability account for $500 that is offset by the marketing expense for the same amount to show that it owes Company A $500 for the ad. At the end of the year when you decide to pay that $500 back to Company A, you would then reduce the liability account “Due to” from company B’s books and simultaneously reduce the asset account “Due from” from Company A which would bring both accounts to zero because you no longer have the asset/liability on the books and the correct amount of money is now in the correct company accounts.

Another possibility is you have a holding company with subsidiary LLCs. The holding company owns the two companies, and each LLC has their own credit cards/bank accounts their transactions are run through. All the shared expenses go through the holding company and are due from each of the LLCs in whatever breakdown is needed. This setup can be especially good if you share a workforce. The employees can track their time for whichever project/company they are doing work for and then for each paycheck, the companies owe the holding company however much labor was attributable to their company.

Best Entity Types for Multiple Businesses

There are four main ways to go about running multiple businesses. Each comes with their own advantages and disadvantages. Which you should choose depends on your unique circumstances.

Advantages

• Low cost
• Easy and fast to add new businesses
• A single set of tax filings

Disadvantages

• All the businesses share liability in the event of a lawsuit because all the books are tied to a single LLC
• Difficult to bring in new investors
• Harder to sell the individual businesses

Advantages

• Total liability protection between each business
• Much easier to sell individual businesses
• Easier analysis of the individual businesses, making it easier to bring on new investors if needed

Disadvantages

• Higher costs due to separate tax filings and administrative duties
• More complex personal taxes as each business comes with their own tax filings
• Better systems are needed to track multiple financial systems

Advantages

• Cleaner tracking when there are several shared expenses as they flow to/from the parent company
• Total liability protection between each business and valuable assets held at the parent level
• Centralized control of assets

Disadvantages

• Complex organizational structure to structure and maintain
• Higher documentation requirements to track intercompany transfers
• Larger professional fees to set up and maintain

Advantages

• Formation cost savings and time savings as you file one LLC instead of many separate LLCs
• Flexibility in how you split the management and financial rights which can affect the tax treatment of each company
• On paper, allows for the same liability protection as if you were forming multiple LLCs

Disadvantages

• Not every state allows for this form of structure
• Because not every state recognizes this structure, a court may not honor the liability protection in a state that doesn’t allow Series LLCs
• Higher complexity for record-keeping

Conclusion

Having more than one company can be filled with complexity. Deciding what kind of structure to create and then figuring out how to properly separate transactions can be a pivotal decision to help avoid unnecessary headaches later on if an audit or lawsuit comes about. Reach out to Volpe Consulting & Accounting for help deciding which structure works best for your situation!