Podcast

Multi-Entity Business Structure: When & How to Do It Right

Multi-Entity Business Structure: When & How to Do It Right

You’ve probably heard it before: just open another LLC. It sounds simple enough. But here’s the problem. Most business owners either overcomplicate things way too early, or they wait too long and end up exposed, overpaying on taxes, and running a complete mess behind the scenes.

So how do you actually know when it’s time to level up into a multi-entity structure? And when you do, how do you set it up so it actually works in your favor?

In this post, we’re breaking down exactly when a multi-entity business structure makes sense, when it doesn’t, and how to build it the right way so it saves you money instead of creating chaos.

The Big Myth: More LLCs Don’t Automatically Mean More Tax Savings

Let’s get something straight right out of the gate. Creating an LLC does not automatically save you money on taxes.

Whether you’re operating as a sole proprietorship or a single-member LLC, the tax treatment is exactly the same. The IRS doesn’t see a difference. So if someone is telling you to open LLCs left and right for the tax benefits, that’s not the full picture.

That said, opening an LLC early in your business journey is still a smart move. Just not for the reason most people think. An LLC gives you legal protection from day one, and it sets you up to elect S-corp status later when the time is right. Think of it as an insurance policy and a foundation, not a tax strategy on its own.

The real tax savings come from how you structure and operate your entities, not simply from how many you have.

When One Entity Is Actually Enough

Before we talk about adding more entities, let’s talk about when you genuinely don’t need them yet.

If you have one core income stream, lower profit levels, and minimal differences in liability across your activities, one LLC is probably enough. Simple is not a bad thing. Simple is clean, manageable, and cost-effective.

Every LLC comes with annual filing fees and administrative responsibilities. Open too many too soon and you’ll find yourself drowning in fees, confusion, and complexity before your business even has the revenue to justify it.

One important rule applies even at this stage though: always separate your active income from your passive income. If you’re running an operating business, that’s active income. If you own a long-term rental property or you’re a passive investor in something, that’s passive income. These two should never live in the same entity. More on that in a moment.

Active vs. Passive Income: The Rule You Can’t Ignore

This is one of the most important distinctions in business entity structuring, and it applies no matter how many or how few entities you have.

Active income comes from businesses you actively operate and manage. You’re in it every day. You’re making decisions, running operations, and driving results. Passive income, on the other hand, comes from activities where you’re not materially involved. Long-term rentals, investments, or businesses where you’re simply a silent partner.

The rule is simple: never mix active and passive income in the same entity.

If you do, you create tax complications and risk exposure that can be very difficult to untangle later. Your passive real estate should always be in its own separate bucket, completely apart from your active operating businesses. This is non-negotiable regardless of your size or stage.

The Real Triggers for Adding a New Entity

So when does multi-entity structuring actually make sense? There are three main triggers to watch for.

Trigger 1: Your Income Is Growing Significantly

Once your business is generating around $100,000 to $200,000 or more in profit, it’s time to start having a serious conversation about structure. At that level, the tax planning opportunities and the legal protection benefits of proper entity structuring start to outweigh the added complexity and cost.

If you’re running a startup generating a few thousand dollars a year, the math probably doesn’t work yet. But as income grows, the stakes get higher and structure becomes more important.

Trigger 2: You Have Multiple Revenue Streams

This is one of the clearest signals that a multi-entity structure deserves a closer look. If you have more than one distinct business or income source, separation starts to make a lot of sense.

Take this example. Say you’re a plumber. You have your plumbing business, a car wash, a consulting practice where you help other plumbers run their operations, and a handful of long-term rental properties. That’s four distinct revenue streams with different risk profiles and different tax treatments. Keeping all of that in one entity is messy, risky, and limits your options down the road.

Separation creates clarity. You know exactly how each business is performing. You know where your risk lives. And you’re protected if something goes wrong in one area.

Liability segmentation is a big part of this. You don’t want a legal issue at the car wash dragging down your plumbing business or your consulting practice. Keeping them separate means one problem doesn’t sink the whole ship.

There’s also an exit strategy advantage. When businesses are organized separately, it’s much easier to sell one without disrupting the others. Want to go all-in on consulting and sell the plumbing business? That’s a much cleaner transaction when the two are already separated.

Trigger 3: You’re Bringing on a Partner

This one is simple. New partner means new entity. Full stop.

Anytime you bring a partner into a business, you need a separate legal structure for that partnership. It creates clean ownership, establishes defined agreements from the start, and makes future exits far less complicated. Partnerships change everything about how you structure things, and we’ll cover the best setup for that a little later.

The Smart Structure: Using an S-Corp as Your Management Company

Here’s where things start to come together. When you’re running multiple active businesses and an S-corp makes sense for your income level (generally $50,000 to $70,000 or more in profit), there’s a structure that keeps everything clean without creating unnecessary complexity.

Instead of electing S-corp status for every single business you own, which would mean multiple tax returns and multiple payrolls, you set up one main S-corp as your management company. That S-corp then owns 100% of each of your other active LLCs.

Going back to our plumber example, it would look like this. Your plumbing business is the main operating company and it’s structured as an S-corp. That S-corp owns 100% of your car wash LLC and 100% of your consulting LLC. Each business is legally separate, with its own bank account and its own activity. But at the end of the day, all the income flows up through that one S-corp. One tax return. One payroll.

This gives you legal separation across your businesses without the administrative nightmare of running three separate S-corps. It’s clean, it’s strategic, and it scales well as your business grows.

One critical note here: even though the S-corp owns the other LLCs, you still need to keep the activity separate. Car wash expenses go in the car wash LLC. Consulting activity stays in the consulting LLC. The separation only protects you if you actually maintain it.

The Partnership Setup: The Best Way to Structure It

Partnerships require a slightly different approach, and it’s worth getting this right from the beginning.

When you bring on a partner, the instinct might be to simply create a shared LLC and elect S-corp status together. That can work, but it creates some real friction when it comes to tax planning. For example, if you want to hire your kids in the business but your partner doesn’t have kids, that creates a conflict inside a shared S-corp. If you want to write off a truck and your partner wants to write off a smaller vehicle, that creates tension too.

The preferred structure looks like this instead. You create a partnership LLC for the shared business. But instead of each partner owning their share personally, each partner owns their share through their own individual S-corp. You own your 50% through your S-corp. Your partner owns their 50% through their S-corp.

This way, tax planning stays inside each person’s own entity. You can hire your kids, choose your vehicle, and run your strategies without it affecting your partner at all. And as each of you grows your own business portfolio, that individual S-corp becomes the hub that connects everything. It can own your share of the partnership, your share of other active LLCs, and any other businesses you’re actively involved in.

It’s a flexible, scalable setup that works whether you’re running two businesses or ten.

The Two Extremes to Avoid

When it comes to multi-entity structuring, there are two common mistakes that trip business owners up on opposite ends of the spectrum.

Doing it too early looks like this: you have multiple LLCs, little to no revenue, and everything is co-mingled because managing separate accounts feels like too much work. You’re paying annual fees to maintain entities that aren’t doing anything meaningful yet, and your bookkeeper has no idea what’s going on. The structure is there on paper, but it’s creating confusion instead of clarity.

Doing it too late looks like this: your business is thriving, revenue is strong, maybe you have two or three income streams humming along. But everything is lumped into one entity. Your financials are messy, you can’t clearly see how each business is performing, and now you have real risk exposure because everything is tied together. Untangling it at this stage is possible, but it’s more expensive and more disruptive than if you had set it up right from the start.

The goal is to stay out of both extremes. Keep things simple until the triggers are real, and then act before the mess becomes too costly to clean up.

How to Know If You’re Ready: A Simple Decision Framework

Not sure where you fall? Ask yourself these four questions.

Do I have different types of income or revenue streams? If yes, multi-entity structuring is worth a closer look.

Is liability separation important given my risk exposure? If one of your businesses carries significant legal or financial risk, separation protects your other assets.

Am I making enough to justify the complexity? Multi-entity structures come with real costs, including accounting, legal, and filing fees. Make sure the income is there to support it.

Do I have partners, or do I plan to bring one on? If the answer is yes, the conversation about structure needs to happen now, not later.

If you’re nodding along to two or more of these, it’s probably time to have a real conversation about your entity structure.

The Perfect Setup: A Quick Summary

If you have no partners, your ideal structure looks like this: one main S-corp as your management company, with each active business sitting underneath it as its own LLC, 100% owned by the S-corp. Passive income activities like long-term rentals stay completely separate and are never owned by the S-corp.

If you have partners, the ideal structure is a partnership LLC for the shared business, with each partner’s ownership stake held through their own individual S-corp. This keeps tax planning independent and scales cleanly as each partner’s business grows.

In both cases, the keys are the same: separate bank accounts, separate activity in each entity, and a clear structure that your accountant and bookkeeper can actually follow.

The Bottom Line

A multi-entity business structure is not about looking sophisticated or checking a box. It’s about solving real problems at the right time.

Do it too early and you create chaos before you have the revenue to manage it. Do it too late and you leave yourself exposed while limiting your ability to grow and exit cleanly. But get the timing and the structure right, and it becomes one of the most powerful tools in your entire business.

If you’re at the point where you’re thinking it might be time to restructure, our team can help. We work with business owners every day to build customized plans based on their specific situation. Head over to taxelm.com to book a free discovery call.

And if you’re not quite there yet but want to start getting clarity on your tax strategy, grab our free Tax Savings Starter Kit at taxsavingspodcast.com/starter-kit. Inside you’ll find the exact deductions most business owners miss, real examples of people saving $5,000 to $25,000 or more, and a chance to talk through your situation with someone from our team.

Found this helpful? Share it with a business owner who’s tired of guessing their way through entity structure. And don’t forget to subscribe for more straightforward tax and business strategy content.

FAQ

What is a multi-entity structure?

A multi entity structure is when a business owner uses more than one legal entity to separate different business activities, revenue streams, partners, or risk areas. For example, a business owner may have one LLC for an operating business, another LLC for a separate business activity, and a separate entity for rental real estate.

Does opening another LLC save money on taxes?

Opening another LLC does not automatically save money on taxes. A single-member LLC is generally taxed the same way as a sole proprietorship by default. An LLC can help with legal protection and future tax planning, but the LLC itself is not what creates tax savings.

When does a business need more than one LLC?

A business may need more than one LLC when it has multiple revenue streams, different types of business activity, different liability risks, partners, or plans to sell one part of the business in the future. The key question is whether the new entity solves a real business problem.

Should active and passive income be in the same LLC?

Active and passive income should generally be kept separate. An active business is one you operate, while passive activity may include long-term rental real estate or investments where you are not involved in day-to-day operations. These activities often have different tax treatment and risk considerations.

Can one S Corp own multiple LLCs?

In some cases, one main S corporation can own multiple active LLCs. This can allow the business owner to keep separate legal entities for different active businesses while simplifying payroll, owner compensation, and tax filing. Passive activities, such as long-term rental real estate, should generally be reviewed separately before being placed under an S corporation structure.

Do I need a new entity if I bring on a business partner?

In many cases, bringing on a new partner is a strong reason to create a new entity. A partnership entity helps define ownership, profit sharing, responsibilities, decision-making authority, and exit terms. This can prevent confusion and conflict later.

What is the best entity structure for a partnership?

One possible structure is a partnership LLC where each partner owns their share through their own S corporation. This can give each partner more flexibility for individual tax planning. For example, one partner may want to hire their children or use a vehicle strategy, while another partner may not.

What happens if I create too many LLCs too early?

Creating too many LLCs too early can lead to extra filing fees, bookkeeping confusion, co-mingled funds, and unnecessary administrative work. If the business does not have enough revenue, risk, or activity to justify multiple entities, the structure can become more complicated than the business itself.

What happens if I wait too long to create a multi-entity structure?

Waiting too long can also create problems. If multiple businesses, income streams, or partners are all operating under one entity, the financials can become messy and risk exposure can increase. It may also become harder to sell, separate, or restructure parts of the business later.

How do I know if I am ready for a multi-entity structure?

You may be ready to review your entity structure if you have multiple revenue streams, both active and passive income, different liability risks, growing profits, business partners, or plans to sell one part of the business later. A multi entity structure should create clarity, protection, and better planning, not unnecessary complexity.

Transcript

Understanding LLCs and Tax Savings

[00:00:00] You’ve probably heard it before, just open another LLC. But here’s the problem. Most business owners either overcomplicate things too early or they wait too long and end up exposed, overpaying taxes, or running a complete mess behind the scenes. So how do you actually know when it’s time to level up into a multi-entity structure?

Today I’m breaking down exactly when it makes sense, when it doesn’t, and how to structure it the right way. So it actually saves you money instead of creating a bunch of. Chaos. Okay, so let’s dive into it. The first thing I wanna talk about is the lie or some of the misconception that is out there where more LLCs equals more tax savings.

And I wanna be very clear, simply creating an LLC does not provide tax savings. Whether you’re operating as a sole proprietorship or a single member LC, the tax treatment is the same between both of those. So creating an LLC does not in and of itself create tax savings. So I wanna be very clear about that.

And what I always talk about is that I think that every [00:01:00] business, as soon as you have a valid business idea, you should be opening up an LLC, but it’s not necessarily for the tax savings. Now it can be an insurance policy. We want to do an S corporation down the road. That LLC can be a really good tool to move into an S corporation when it makes sense.

But where that LLC comes into play is for a legal protection aspect. And obviously you wanna talk to an attorney about a lot of the legal side of what we talk about today, but that’s always my recommendation. Once you have a business that’s up and operating, you’re starting to generate activity in that business.

Open up an lc. You don’t need to necessarily do an S-Corp election right away, but open up that lc so that you got that protection from a legal standpoint, which an attorney can talk to you about. But then you also have that structure to set up when, if and when an S corporation makes. You’re ready to rock and roll with it because you have that LLC structure set up.

So I would never recommend somebody from, at least from a tax perspective, to just start opening up all these different lcs for all these different operations. That isn’t necessarily the case. Now we’re gonna talk about when multiple [00:02:00] lcs make sense and when it doesn’t, and you know how we start to analyze that.

Transcript

Understanding LLCs and Tax Savings

When a Single Entity is Enough

So let’s first talk about, you know, when just a single entity is actually enough. Because if you talk to some attorneys, or if you’re in some groups out there, they’ll just start saying, open an LLC here, open an LLC here. Or you sign up for a program and you get unlimited LLCs created by them. That can just create expensive.

Every LLC has an annual filing. There’s costs associated with that. It can create confusion, complexity, and what we often see is that people open all these different LLCs. It’s too much work to have like an account here, a bank account here, a bank account there, and they’re operating multiple lcs out of one bank account.

And that defeats the purpose of having those multiple LLCs. So start to be very strategic. And we often talk about when one entity is enough. If you have one core income stream, you have lower profit levels, you have minimal liability differences between all the activities that you’re doing.

One LLC might be enough. Now, I wanna be very clear. We also want to be sep make sure that we separate [00:03:00] active activity from non-active activity. So what I mean by that is that if you are running a business that you are actively participating, it’s an operating business, and you’re the manager, you’re running that business.

That is what we consider active type income. Now, if you have businesses that maybe you don’t do operations of, or maybe it’s a rental property, it’s a long-term rental property, that’s considered gonna be considered a passive. Type activity, and we never wanna mix those two in the same entity. So if you have a business that you’re operating out of, that’s gonna be in the active side, that’s gonna be an LLC over here.

If you have a separate entity, maybe it’s a short term rental, maybe it’s a business that you’re just an investor in, but you’re not actually operating outta that. We do not want to. We do not wanna combine that with your active activities so that where there could be separation even in a smaller level, where you’d separate at least your active activities from your non from your passive activities.

Triggers for a New Entity

So that is something to look at. But what we often see is that people start to think they hear stuff, they watch TikTok videos and they get [00:04:00] super advanced from an entity standpoint long before they really need to. And so I want to help, hopefully help avoid that and talk to you about when it does make sense.

And we’re gonna talk about the first real trigger of when you need to add a new entity. We’re gonna talk about when partnerships come into play, if you have multiple different income streams. But let’s first talk about that first real trigger. That’s saying another entity makes sense. And usually there’s a couple different triggers that we wanna pull.

One is that typically you’re gonna start to look down this route once you have, you know, higher income levels. So you know, maybe you’re profiting a hundred thousand, $200,000 in your business. We might start to look at that, at that. If you are operating a bunch of startups that are generating a thousand dollars in, in, in profit per year, is there really that protection that you need from an LLC?

Maybe, maybe not. Something I talked to an attorney about. Generally that trigger that we start to see these, these being pulled on is once you have income at a higher level, the second biggest trigger is you have multiple different revenue streams. And so take partnerships out of that. We’re gonna talk about that later, but if you have multiple [00:05:00] stream revenue streams, that’s typically gonna be a trigger where it’s saying, okay, it might make sense now to open up separate lcs.

So let’s use an example. Let’s say that you are a plumber. You have a plumbing business that you do your day-to-day stuff in. You have a car wash business. You have a consulting business where you help other plumbers help operate their businesses, and then you have some long-term rental real estate properties.

There’s an example where you have multiple streams of income. You have a plumbing business. You have a car wash business, you have a consulting business, and you have a real estate business. There is definitely need for separation with all those different revenue streams that you have going on, and why?

Why does it matter? Why do we even need that separation? A couple different things, different risk. In different tax treatment. Obviously an attorney can talk to you about the risk side, but there’s different tax treatment, so that real estate is gonna be considered, if it’s a long-term rental, that real estate is passive income.

We never again wanna mix passive real estate with an active business. So that’s gonna be separately all the, all right. Right. To begin with that real estate’s gonna be in a [00:06:00] separate area on, on the passive side, but then the plumbing, the car wash, and the consulting business. All of them are very different.

They’re not associated with the same thing, and they have different risks. And so the payoff is that separation creates clarity. And when we also talk about li liability segmentation, we don’t necessarily want one ship to sink the entire ship. And if, and again, a legal standpoint, but if, let’s say you have a plumbing business.

Car wash consulting business, all businesses that you’re active in, but different realms of businesses. Let’s say you have an issue at the car wash. Do you really want that car wash issue, that legal issue to attack your plumbing business or your consulting business? Or what if you have an issue with your plumbing business?

Do you want that issue to then drag into your car washing and consulting business? Those are the things when we start to say, okay. These are some levers being pulled at saying, let’s start to probably look at different types of, of treatment of this to help provide that protection. The other reason that we start to [00:07:00] look at we start to pull that lever when we have multiple businesses or multiple income or revenue streams, is that we have the ability of an exit.

So let’s say that you have a plumbing business, car wash, business and consulting business. You might want to say at one point, I want to go deeper into the consulting side, so I’m just gonna sell. My plumbing business. Well, when you have that separation, it’s easier to exit different parts of your business.

Now, we can still do it if they’re, if they’re on one, but it’s much easier to create that separation and much easier to exit different businesses when they’re organized separately. Now, organizing separately doesn’t necessarily mean that you know they’re gonna be, that, that, that they can’t be wrapped up into one, ultimately, one entity that you operate out of, and we talk about this a lot with an S corporation, an S corporation, is a strategy that we use and talk with business owners every single day about how we minimize the amount that we’re paying in self-employment taxes.

And, you know, check out our, our YouTube channel, our podcast, our, my book, my Tax M we talk about the benefits of an S [00:08:00] corporation. To go go into some of the content that we’ve put out there for that. But when an S corporation makes sense, typically, say you’re making 50, 60, $70,000 or more in profit, that’s when an S corporation makes sense.

So when we set up these multiple entities, we might have in that, in that example where you have a plumbing business, a car wash consulting business in real estate, we might have multiple LLCs, an LLC for each of those. The real estate, again, we’re always gonna keep separate, but the cleanliness here. Is that if we want an S corporation, instead of having an S-corporation for the plumbing business, an S corporation for the car wash, an S corporation for the consulting business, that creates complexity.

That’s three separate business tax returns. That’s three separate payrolls do you need to run? Instead of doing that, we would say, let’s set up a management company. That management company, it could be the plumbing business where that managing company’s gonna be the plumbing business. Which is gonna be an S corporation.

So you have that solid foundation of an S corporation, and then that S corporation is going to own a hundred percent of the other [00:09:00] lcs that are active businesses. So that car wash that you’re active in, that’s gonna be a separate LC, but it’s gonna be 100% owned by the S corporation. That consulting business that you’re active in.

It’s gonna be a separate LC, but it’s gonna be 100% owned by that S corporation. And what that does is you create that legal separation where you have multiple LLCs, but they’re all flowing through to one S corporation and then going to you as the business owner. And so that’s that cleanliness that we like to talk about and that’s why we can’t just say, open up an lc here, open up lc here.

You own this. Spouse owns this and create all this stuff. We, we, we need to be strategic. When we start to open up, when we start to pull these TRA levers of different entities, we need to be strategic about how we do it, and that’s why it’s so important for that. The other key thing that I wanna talk about as we’re talking about separate entities.

Is the need to create separation inside there. So just creating an LLC doesn’t do anything. We need to actually treat it as a separate business. That means separate bank account information, that means separate board of directors, [00:10:00] separate meetings, separate, all these different things. So if you have an S corporation.

That is your gonna be your management company. You can’t run and, and let’s say you have a separate LLC for your car wash, separate LLC for your consult consulting business. You can’t just run all those expenses in an S corporation, although the S corporation owns those. We wanna make sure car wash activity is in the car wash.

LLC consulting activity is in the consulting LLC. And then yes, at the end of the day they’re gonna wrap up into one entity that S corporation and file one s-Corp tax return, one payroll to you as the owner. But we wanna make sure that we’re separating the activities from it, and that’s gonna help protect you down the road as well.

Partnership Strategies

So let’s also talk about partnerships and in, in, in the best entity structure some of the extremes that we see with this. But quick pause because this is where most business owners get stuck. You know, their tax strategies out there, but you just don’t know which ones apply to you or how to actually implement them.

Without messing something up. So instead of guessing, we put together something simple. It’s called our Tax Savings Starter Kit, and it’s completely free inside. You’re gonna get the [00:11:00] exact deductions that most business owners miss. You’re gonna get real examples of people saving 5,000, $10,000, or even $25,000 and more.

And you’re gonna get a chance to talk through your situation with someone from our team. No fluff, just clarity. Go to Tax Savings Podcast. Dot com slash starter kit. That’s tax Savings podcast.com/starter kit to grab it. Now I wanna talk about partnerships. ’cause partnerships change everything. In this, in this, in this, in this structure.

If you’re bringing in a partner, you need a new entity. And that’s period. New partner, new entity. Done. Why do we want to create a new entity? One, it creates clean ownership. You have defined agreements with that and it, and it allows for easier exits. Now, when we talk about bringing on a partner, and if we’re thinking about an S corporation, we run into two issues.

One, one option. Is we create an LLC for this new partnership and that LC is an S corporation. The secondary option is we create an LLC for this new partnership and [00:12:00] we leave it a partnership, but we have our ownership in that partnership be the S corporation. That we own a hundred percent of. And let’s talk about both of those examples.

Let’s say you go the route of, of, of doing an S corporation with your partnership. And, and we see this, it can happen, it can work. It’s not a recommended, it’s not our, our favorite option, but it is an option. So with that, you’d have an LLC. Let’s say it’s 50 50 partners, you own 50% personally, your partner owns 50% personally, and you elect S-corp status there.

You’re gonna be taking reasonable salaries outta there, but here’s where some issues arise. Let’s say that you wanna start to do some tax strategy, and let’s say that you wanna hire your kids in your business. But your partner doesn’t have any kids. Well, we might have some conflict there because you’re gonna have to hire them in that S corporation and you’re gonna benefit from it, but your partner’s not gonna benefit from that.

How do we do that? Maybe you want to get a business vehicle and you want to drive a F-150, but your partner wants to drive a Toyota Prius. Well, there’s gonna be some, some conflicts there because your vehicle’s more expensive [00:13:00] than their vehicle. Is, and so that’s why we love this idea when you have a partnership, we create that LC and it’s a partnership, but the owners in that partnership, instead of you owning it individually, you own it through an S corporation that you own a hundred percent of.

So what does that mean? We have this partnership, LLC partnership. That the profits passed down to each individual as corporation. As corporation for you, as corporation for your partner. And then you can do planning inside of your as corporation. You can hire your kids. They don’t have to, and it’s not gonna affect their side.

And so that’s our, our, our, the best setup, the setup that we really like to do, especially as you start to own multiple businesses. Well, now that S Corporation can own part of your partnership. That S corporation can still own part of your car wash. That S corporation could still own part of that consulting business, and it’s not affecting everything.

And so we say we love the idea, especially as you start to generate some income of everybody having an S corporation that they own a hundred percent of. And think of it [00:14:00] like a management company. That S corporation is gonna be your management company, and it is gonna own any interests that you have in active businesses.

And so that is our preferred setup. Now, it doesn’t mean it has to be that way. We definitely see S corporations with partnerships, but we love the S-corp, the partnership LLC, with the ownership being individual S corporations for each of the owners. That’s our favorite setup. Again, it doesn’t have to be that way.

So when we talk about multiple entities, there’s two extremes. That we see one is too early. You have multiple LLCs, you have no revenue, you have a bookkeeping mess. There’s confusion and you’re co-mingling everything. So you have all these different LLCs, but everything’s co-mingled because you have no activity and it’s a lot of work.

You’re racking up fees yearly to keep these active and creates a mess, confusion. You don’t really know what’s going on. The people around you, your bookkeeper, your accountant, don’t really know what’s going on. That is one extreme where you go into this multiple entity structuring.

way too early. Now the other [00:15:00] one is you go into it too late. You didn’t do any entity structure when you began, but also now you’re doing really good in revenue. You’re rolling. You have multiple businesses, multiple revenue streams, but everything’s combined. You have messy financials, everything’s in together.

You don’t know how one business is doing compared to the other ’cause it is piled into one, and there’s risk exposure now that you have multiple revenue streams and active activity in all of those. Now it’s all in one entity and there’s some risk exposure there. So we wanna make sure that we’re not in the too early realm where we’re creating things and creating a mess of something before we actually have a reality of operating in successful businesses.

But we also want to avoid the too late problem. If you are in that too late problem, we wanna start to clean that up quickly. And the biggest thing that I say is that as you get your businesses going, keep this in your mind because you know what? Revenue hits fast. Businesses can grow fast, and when they’re growing fast.

You sometimes you don’t think about entity structure until it’s too late. So as your business is growing, as you’re starting to see that [00:16:00] growth, make sure you put this on your list. Okay, we’re generating income. Maybe it’s 30,000, maybe it’s $40,000 in revenue, whatever that number is, we’re starting to generate income.

The Decision Framework

Let’s make sure we tackle this multi-entity item before it gets too late. So how do you know when you’re ready? Let’s talk about some decision framework to say, yep. I think we’re ready to look at some multiple entity structure. Some questions to ask yourselves. Do you have different types of income? Do you have different types of revenue streams?

If so, you might want to start looking at multi-entity structuring. Is liability separation important? Now, is there a high risk exposure in one or, or multiple of your different revenue streams? You know, if there’s no high risk, maybe we don’t need to, you know, talk to an attorney about that of whether it makes sense to or not.

But if you have high risk, we want to create that separation. It might make sense to do some multi-entity structuring. Third question to ask, am I making enough? To justify the complexity that multi entities bring. That’s a question you want to ask yourself. And then, do you have partners or do you plan to have partners?

Of course, [00:17:00] that is a trigger, definitely a lever that’s being pulled at saying yes. Let’s start to look at multi entity structuring. So to kind of wrap up and really put a bow on, on this topic, I want to talk about kind of the perfect setup that we like to see, especially when we talk about, we’re gonna talk about a scenario with no partners in a scenario where you have partners.

So the perfect setup. If you have no partners, is that you have a main company that’s gonna be kind of your operating company, your management company, your main operating company, and that operating company is gonna be an S corporation if you have the income for it to make sense. So let’s look at that plumbing business.

Let’s say your main operating company is this plumbing business plumber, X, Y, ZLLC, and then you own a car wash. That car wash is gonna be a separate LC. That’s owned 100% by that main operating S corporation. And then you have a consulting business. That consulting business is gonna be 100% a separate LLC, that’s owned 100% by that main operating company, that main S corporation.

So with that [00:18:00] situation, you’re creating separation. Between these multiple different revenue streams, but the income, the activity is all flowing through that one main operating, that one main management company at the end of the day with one S Corp tax return because they are 100% owned by that. Now, let’s say that you have a partnership now, and so you own 50% of that partnership.

Who’s gonna own that partnership? 50. That you’re 50%. Separate LLC, that 50% of your ownership of that partnership is gonna be owned by your S corporation. Again, if this is all active businesses, if we’re talking about passive businesses, businesses, that you’re not part of the daily operations of real estate, that you’re just a passively managing that is separate.

We do never want to combine that. We never want to have an S corporation own a passive type business. But anything that you’re active in, that’s, we’re talking about that S corporation. That you own a hundred percent of. And then if you have separate LLCs, whether it’s just a LC that you own a hundred percent of or an LLC with a partner, we’re gonna have those separate LLCs owned by your core management [00:19:00] company.

Biggest thing here is that we need separation. Make sure you have separate bank accounts. Make sure you have separate activity in those separate LLCs. ’cause that’s what’s gonna help create that protection and talk to attorney about this. There’s a lot of different ways to set this up. We work with us all the time in in tax sale.

Reach out to us at tax Sale, join our program. Ask our pros. Our pros will help walk you through the best setup based on your exact situation customized to you. So now let’s talk about the perfect setup with partners. This is where you have partners. Perfect setup with partners is to have a partnership LLC partnership as the main company, and then each owner is gonna own their share in that partnership via an S corporation that they own 100% of.

Again, that’s our preferred method because then you can do tax planning with inside your S corporation. That’s not gonna. Your other partners, and if either partner is involved in multiple businesses, this makes it so much more beneficial because they’re gonna have an S corporation anyway. If we talk about the perfect setup before, well now they’re gonna already have that S corporation and they’re sharing any partnerships that they’re actively [00:20:00] in can be owned by that.

Again, let’s always remember to separate passive activities from active activities. We wanna make sure that there’s that separation there, but those are the setups we have. Main S corporation that owns your other active operating companies, a hundred percent of if you’re in a partnership, you’re gonna have a partnership LLC.

That’s a partnership. The ownership in that partnership is gonna be your and your partner’s individual S corporations where you can do planning with inside there. So here’s the bottom line. Multi-entity structures aren’t about looking sophisticated. They’re about solving real problems at the right time.

When it makes sense, do it too early and you create chaos. Do it too late, and you limit growth and expose yourself to risk, but do it right and it becomes one of the most powerful tools in your entire business. If you found this helpful, don’t forget to subscribe. Hit that like button and share it with a business owner who’s tired of guessing their way through this stuff.

And if you’re at the point where you’re thinking, okay, I might actually need to restructure this the right way, our team can help head on over to [00:21:00] tax elm.com. That’s TAX. elm.com or click the link in a description for to book a free discovery call with our team. We are helping business owners every single day walk through this, build customized plans based on their structures, their setups, and we can help you too.

Thanks for tuning in, and I’ll see you on the next one.

Triggers for a New Entity

Partnership Strategies

The Decision Framework

Thanks for tuning in, and I’ll see you on the next one.

Cut Your Tax Bill by $10,000+ This Year — Legally

Discover the exact strategies real small business owners use to slash their taxes and keep more of what they earn. Inside the Starter Kit, you’ll find practical tools you can start using immediately.