How to Transition from One Company to Two Effectively.

by

Learning how to transition from one company to two effectively is key to help protecting your net worth.

When starting a business you formed a separate legal entity to separate your personal and business assets, lower your audit of risk, improve your chances for more business credit and convey a more important marketing message. As time goes on and your business succeeds you will want to examine when the time is right to form a separate legal entity to now reduce the liability exposure to your current business.

How to Transition from One to Two Entities and Stay on Track

How to Transition from One to Two Entities and Stay on Track

You may have a successful online internet business and now you are going to introduce a new product to your list that may have more liability associated to it. An obvious one would be if you were looking to invest in real estate. That would definitely be in a separate legal entity from your operating business. Many times I talk to business owners who have been in business for 10, 15 or 20 years and still operating EVERYTHING through one legal entity! That can be very dangerous. That means one lawsuit where the insurance company comes up with an excuse (also known as loophole) where they do NOT have to provide coverage. That means potentially, 10, 15 or 20 years of hard work down the tubes!

Let’s assume you are going to add a second legal entity for part of your business to separate out liability (or maybe you have a different partner on that one). Let’s cover the steps to make this a smooth transition! The easiest way to look at this as if you are starting over with the same steps you used to form your first company. The mistakes come in when you are tempted to take short cuts to save money (like not getting separate business cards, a separate business license)

Here are the steps to transition from one company to two for each company:

  1. Trademark your business name
  2. Form a separate legal entity
  3. Obtain a separate LLC/Corp record book.
  4. Obtain a separate EIN number.
  5. Open a new bank account for the new entity
  6. Proper capitalization from the correct owners (you, another entity, trust…)
  7.  Apply for a business credit card in the name of the new LLC/Corp.
  8. Separate the expenses related to this new entity.
  9. Apply for a business license http://www.businesslicenses.com/
  10. Check with a local professional for other requirements which may include, other state filing requirements with the department of taxation or franchise tax board.
  11. Establish a DBA name to this separate legal entity is required.
  12. Establish a separate set up books. If you are using QuickBooks® or Xero create a new company file for the new company.
  13. Obtain separate insurance if required by the company
  14. Establish a separate payroll account if payroll is required.
  15. If the Entity is in Nevada, and you are operating in another state, take the steps to foreign register in that state you are doing business.
  16. Establish a 5-year business plan (so the entity is not considered a hobby plus a good idea to keep you on track anyway).
  17. Establish new accounts with vendors for the new business. Even if your first company does similar services, it should be separated.
  18. Establish a separate merchant account and the new entity.
  19. Follow LLC or corporate formalities.
  20. Avoid commingling of funds.

The key is to be organized when you transition from one company to two.  I know it would be easier to just keep things simple, but simple and asset protection are inversely related. Successful business people do not have all their business holdings in one LLC or corporation. The key is to separate your assets and diversify your risk, just like you would diversify your investments for success.