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 one 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 single-member LLC also has an active eBay business. From a marketing perspective, it does not make good business sense to conduct the eBay activities through the LLC; they can be run as a sole proprietorship or other entity formed exclusively for online selling.

Tax Reasons

There may be tax reasons for separating businesses into different entities. Depending on the nature of each activity, one might be better operated on a calendar year, while it makes better sense to use a fiscal year for another.

It is usually wise to use a separate entity to own real estate that will be used by the business. This allows the owner to make decisions regarding the real estate without involving the business. For example, a single owner of a dental practice run as a professional corporation may buy a professional building, using an LLC. The practice can lease space from the LLC, but the owner can decide when or if to sell the building. For instance, for estate planning reasons, the owner may decide to gift interests in the LLC to family members and cede ownership and/or control to younger relatives. As long as the terms of the lease are fair (i.e., a reasonable rent is charged), the practice can deduct its lease payments even though it is the dentist who is ultimately receiving the rents as owner of the LLC.

In deciding between a single entity or multiple entities, factor in the passive activity loss rules. If you are a silent partner in one activity and active in the other, losses from the silent (passive) activity cannot be used to offset income from the active business; if these separate activities were run within a single entity, income could be offset by losses, and it might be possible that no activity would be viewed as a passive activity because of your level of participation in the overall business.

In deciding between a single entity or multiple entities, take state taxes into account. The added cost of additional state taxes for multiple entities may make using a single entity preferable.

Advantages and Disadvantages

There are both advantages and disadvantages of a controlled group.

Advantages include:

• Minimizing payroll taxes when an employee works for more than one related corporation. Under the “common paymaster rule,” one corporation is designated as the paymaster responsible for payroll taxes so that each corporation does not pay payroll taxes that could have been avoided. For instance, in 2016 if a shareholder works for his 2 controlled corporations, earning $125,000 from each, one is designated as a paymaster and pays the employer's Social Security portion of FICA on wages up to $118,500, a tax of $7,347. Without a common paymaster, each corporation would owe this tax.

• Flexibility to sell off property or business units without selling the entire business. But if a member of a brother-sister group sells property at a loss to another member of the group, the loss is not deductible in the year of sale but is postponed until the property is sold outside the group.

• State tax simplification (filing a single return for the group).

• Ability to attract investors or obtain financing.

• Different tax elections (accounting method and tax year) are still allowed.

Disadvantages include:

• Graduated corporate tax brackets must be allocated (to prevent each corporation from enjoying the benefit of the lower brackets).

• Allocation required for other tax breaks, including first-year expensing (Sec. 179 deduction), the AMT exemption, the accumulated earnings tax exemption, the disabled access credit, and certain other tax breaks.

• Postponement of loss recognition on intergroup sales.

• Employees of each corporation are treated as a group for purposes of employee benefits and retirement plans (e.g., testing for nondiscrimination of a plan must take employees of all group members into account).

• Full-time and full-time equivalent employees are aggregated for determining whether a company is an applicable large employer for purposes of the Affordable Care Act's employer mandate.

The losses of one corporation cannot be used to offset the profits of another unless the group files a consolidated corporate income tax return.

Tax Returns

Each entity is required to file separate federal income tax returns. For example, a sole proprietorship for consulting and another for a gift basket business must each complete a separate Schedule C.

Separate returns are also due at the state level in states that impose an income tax or annual filing requirement.

Entities that own or are owned by other entities may have to disclose this information on their tax returns. For example, corporations must include detailed information about ownership in Schedule K of Form 1120 if any foreign or domestic corporation, disregarded entity, partnership, or trust owns (directly or indirectly) 20% or more of the total voting power of all classes of the corporation's stock entitled to vote. Such information includes the name of the entity, its employer identification number, type of entity, country of organization, and percentage owned of the voting stock.

First-Year Expensing

The Section 179 deduction applies at the owner level for pass-through entities. Thus, individuals who own more than one such business must use care to optimize this write-off.

Retirement Plans

Having separate entities can help owners boost their retirement savings.

But owners of multiple businesses are subject to an overall limitation on salary reductions, the so-called employee share of contributions, to 401(k) plans and SIMPLE plans. In 2016, for example, the maximum employee contribution to a 401(k) plan is $18,000 ($24,000 for those 50 and older by year-end). If an owner's multiple businesses each maintains 401(k) plans, the most he or she can add in 2016 is this dollar limit.

Multiple businesses with common ownership are treated as a single business for qualified retirement plan rules (see Chapter 16).

Employer Mandate

Whether you are an applicable large employer (ALE) required to provide minimum essential health coverage and file Forms 1095-C for employees depends on the number of your full-time and full-time equivalent employees (see Chapter 19). All employees of your multiple businesses are taken into account using the same rules that apply to retirement plans (see above).