Learning how to transition from one company to two effectively is key to protecting your net worth.
When starting a business, you formed a separate legal entity to separate your personal and business assets, lower your risk audit, 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 it is right to form a separate legal entity to reduce liability exposure to your current business.
You may have a successful online internet business, and now you will introduce a new product to your list that may have more liability associated with 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. I often 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 will add a second legal entity for part of your business to separate 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 is to start 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:
- Trademark your business name
- Form a separate legal entity
- Obtain a separate LLC/Corp record book.
- Obtain a separate EIN.
- Open a new bank account for the new entity.
- Proper capitalization from the correct owners (you, another entity, trust…)
- Apply for a business credit card in the name of the new LLC/Corp.
- Separate the expenses related to this new entity.
- Apply for a business license http://www.businesslicenses.com/
- Check with a local professional for other requirements, including other state filing requirements with the department of taxation or franchise tax board.
- Establish a DBA name for this separate legal entity is required.
- Establish a separate set of books. If you are using QuickBooks® or Xero, create a new company file for the new company.
- Obtain separate insurance if required by the company
- Establish a separate payroll account if payroll is required.
- If the Entity is in Nevada and operating in another state, take the steps to foreign register in that state you are doing business.
- Establish a 5-year business plan (so the entity is not considered a hobby plus a good idea to keep you on track anyway).
- Establish new accounts with vendors for the new business. Even if your first company does similar services, it should be separated.
- Establish a separate merchant account and the new entity.
- Follow LLC or corporate formalities.
- Avoid the commingling of funds.
The key is to be organized when you transition from one company to two. I know it would be easier to 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.Tags: company, DBA, legal entity, license, merchant, Nevada, transition