If I have two businesses, can they buy goods or services from each other?
Yes, two different businesses that you fully own can buy goods or services from each other, but there are caveats. If you are not the full owner of both businesses, you may want to carefully consider your partners’ or shareholders’ rights.
If you founded the businesses as separate legal entities, and you own both businesses in full, your businesses can deal with each other like any other business. As long as the transaction is not illegal and is recorded properly, your businesses can buy goods and services from each other. You can write a Business Plan for each business that shows they will buy and sell to each other so you know how it will work in the long term.
It is a good idea to keep your businesses separate for legal and tax purposes. While it might seem like a lot of work to set up two separate limited liability companies, this method protects the assets and income of each company from any legal risk that would affect the other one.
Can I legally use the profit from one business to pay for the costs of the other?
Yes, but how you do this makes a significant difference. It all depends on how the businesses are structured or organized. If all your businesses operate under one LLC, or through you as a sole proprietor, then taking profits from one business to support another may just be part of the overarching business goal of the LLC or sole proprietorship both businesses operate under.
If your businesses are separate, distinct entities, you still have several options. But unlike operating these businesses under a single LLC, you probably cannot simply move money from the profitable business to the struggling one without the risk of tax consequences.
The most common way business owners move money from one business to another is through the use of an owner draw. This is when a business’s owner withdraws funds from their own company to effectively pay themselves. Business owners frequently withdraw profits for their own personal use. Once they have withdrawn those funds, they may use the money for their other business ventures.
Another common option may be to give the struggling business a loan. You do not have to charge interest on the loan, but you may. Just be sure to record that interest on your taxes if you do. Also, be mindful that businesses with joint owners, members, partners, shareholders, or other stakeholders, may not be so keen on supporting another individual owner’s struggling business without some compensation.
If your businesses are separate entities, the law may require you to deal with them separately. To reduce legal risk, you might have the profitable business make a loan to the struggling one. The loan would be recorded in a Loan Agreement or Promissory Note with any interest rates and repayment plans.
Can I use the same accounts for different businesses?
When it comes to mixing funds, the companies’ structures may matter because each business has its own separate legal identity under the law. The type of business structure you choose can affect how your business is taxed, how you can mix funds, and what it must do under the law.
The types of business structures usually include sole proprietorships, partnerships, S corporations, limited liability companies, C corporations, and B corporations. Below are some details about the most common business structures:
- Sole proprietorship. If your business is registered as a sole proprietorship, then you and the business are legally the same entity. The sole proprietorship is taxed on the Schedule C using your own Social Security number, but there is no protection if you get sued.
- Limited liability company. An LLC offers limited liability protection, meaning it limits how much legal responsibility you have personally for debts of the business. An LLC is registered with the state, has an Operating Agreement, and has its own tax and legal identity separate from yours.
- Corporation. This structure also makes the business identity separate from your personal identity. It provides personal legal protection to its owners and pays its own taxes on Form 1120.
- Single-Member LLC. Also referred to as the “disregarded entity,” the SMLLC has one owner and limited legal responsibility. It is considered separate from the owner for personal risk purposes and for some tax purposes.
It is a common best practice to utilize separate business bank accounts for each separate business you run.
What are the risks of doing business with my own businesses?
The risks involved with having your own businesses transact with one another largely depend on how the businesses are structured and organized. This is less of a problem when businesses all operate under a single organizational structure. Typically, business owners can find themselves in tax or legal trouble for:
- Keeping poor records of their transactions, or no records at all.
- Misusing funds.
- Taking advantage of shareholders or partners.
- Avoiding tax obligations when withdrawing or transferring funds.
If you are not careful with your handling of funds and record-keeping, creditors may sue you personally if your LLC or corporation moves money from the business account to your personal or other business accounts. Losing the personal liability protection of an LLC or corporation is known as “piercing the corporate veil.” Three things may cause piercing:
- Unreasonable mixing of funds (moving money between accounts).
- Failing to handle the business legally and separately from personal matters.
- Using business accounts for personal expenses.
Can my employees from one business help with my other business?
Businesses may be able to share employees, but it can be legally complex. Even though an employee may technically work for the same owner, your businesses may be separate entities. This can result in the two businesses being seen as joint employers. Joint employers are two or more companies that share control of an employee. As a result, each employer is responsible to pay minimum wage and overtime pay under the Fair Labor Standards Act, but not for the same work. Also, each could be responsible for workers' compensation and unemployment insurance.
Joint employees can be horizontal, meaning they work for two companies with a relationship, such as franchises. Or they can be vertical, meaning one company is the direct employer that provides employees to a second business, like a staffing agency. Direct employers hire the employee and pay their wages and any income taxes. However, the second business benefits from the employee’s services without having to pay those costs, though they may still pay the other business for the costs of the labor provided.
Is it legal to share resources between my own businesses?
Yes, however, it may not always be a simple straightforward process if your businesses are organized as completely separate entities. One way to simplify the sharing of resources is to organize your businesses under a single parent company.
For example, you might form a separate subsidiary company of your main company if you need to share a lot of resources between the businesses. A subsidiary company is one that relies on support from the parent company, or main company. Using a subsidiary instead of two separate businesses may let you share resources with less complications.
Luckily, it is usually easy to form a parent company-subsidiary relationship with the LLC structure. Subsidiaries can protect your assets without all the paperwork the state requires to form a separate company. You decide which company will be the parent company and create it like any other LLC. However, a subsidiary typically operates as a separate business. Also, you likely cannot transfer assets from one company to another to avoid tax or legal responsibility.
Another option for businesses owned by the same owner is to form a Joint Venture. This allows two or more companies to agree to work toward a certain business goal together. Joint ventures may be useful for carrying out specific projects or to combine resources. The percentage of responsibility and profit sharing does not have to be equal between the parties.
Do you have more questions about running multiple businesses, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.