Your small business in Concord, NC, is doing so well that you’re able to hand off the operation to a trusted associate and turn your thinking to operating a new business. Once you’ve decided on what venture you’d like to engage in, you’ve got some questions facing you as to the corporate structure. One option is to use the existing corporate structure for your first business, but it may not be a wise idea to go that route. An umbrella corporation might make more sense as it maintains legal protections while separating business assets. Here’s some of the reasons why:
Maintain Corporate Protections
Starting a second business and operating it as a sole proprietorship to separate it from the main corporation is perfectly legal, but may not be beneficial to you. A sole proprietorship comes with full liability and exposure to a lawsuit that targets personal assets. Starting a second, or child, corporation with the help of a Charlotte NC business accountant is a solid course of action because it keeps personal assets out of the reach of lawsuit in the event something goes wrong.
Ownership of Physical Assets can be Handled in Multiple Ways
There are different ways to structure ownership of physical assets by the corporation and take advantage of depreciation for tax purposes. The original corporation can own the assets and lease them to the child corporation. The child corporation pays the lease to the parent corporation even though they are both under the same ownership. Alternatively, it may make more sense for both corporations to own their own assets and use depreciation to reduce tax liability for both companies.
Prevents Brand Dilution From the Parent Company
The second business you’re thinking of creating may have nothing in common with your first business. This means it’s a good idea to keep their identities separate from each other to prevent confusion from the customer base. Many large corporations that own multiple brands do this to prevent each brand from becoming associated with one another. It’s a good practice and it’s something that you can do for yourself even if you only have two businesses. Your existing customers won’t know that you have more than one business unless you decide to inform them. And you might prefer that the new company form its own identity separate of the original, so you can keep it somewhat secret and do so legally.
Money can Flow Between Corporations
Money can transfer between a parent and child corporation in many ways although some incur a tax liability that you might want to avoid. One of the easiest way to transfer money to the parent corporation is to have the child corporation file for disregarded entity status with the IRS. This status allows the child corporation to transfer funds to the parent corporation because it’s not considered a separate entity for the purposes of taxation.
Another option is forming a consolidated group of companies. This requires that the parent corporation have at least 80 percent ownership of stock in the child corporation. Having this much stock ownership allows all corporations to file a consolidated group return and the ability to consolidate the financials of both companies together while maintaining a separate identity.
Enjoy the Tax Benefits of the Corporations
When you work as a sole proprietor, your taxes are higher than if you incorporated. It’s another reason why you should form a second corporation for a new business venture. Your second business can take off overnight and generate a lot of profit that’s subject to taxation. It’s far better to have a Charlotte, NC, business accountant help you form the second corporation so you can take advantage of corporate tax laws and not pay the sole proprietor tax rate.
Creating an umbrella corporation is straightforward with the benefits outweighing the drawbacks. It’s true there’s more paperwork generated by having more than one corporation, but your Charlotte NC business CPA can help manage the paperwork and keep your books straight. Meanwhile, you can focus on finding more success.