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CalAttorney2, Attorney
Category: Business Law
Satisfied Customers: 10244
Experience:  I am a businesses law attorney, with experience advising and representing owners and investors.
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What's the best legal structure to protect my personal

Customer Question

What's the best legal structure to protect my personal assets from lawsuits, if I wanted to create multiple online businesses that are not linked to each other? What's the most tax beneficial setup? I was told to create a Holdings company LLC which owns
another LLC for each business. This way I can pay myself out a salary and pay less in tax, however its getting quite tedious and I'm not even sure if its needed. Basically this set up Health Product 1 Holdings LLC owns Health Product 1 LLC Skin Product 1 Holdings
LLC owns Skin Product 1 LLC and on and on.. I would be the owner of each of the Holdings companies. IS this necessary, whats the best set up? They are all LLC's and I was told the only difference is that the holdings company will be taxed as a S corp which
will make me pay less in taxes so in the long run its worth doing the extra steps I just want some clarity and some feedback on this. Also if I decide to create another diet product should I add it under the holdings company or create a whole new Holdings
company just for this second diet product?
Submitted: 1 year ago.
Category: Business Law
Expert:  CalAttorney2 replied 1 year ago.

Dear Customer,

As far as which is best (LLC vs. S-Corp.) for tax purposes, you will need to speak with a local tax professional (accountant or tax attorney) as the best after tax return for you will depend on your entire financial portfolio (you need to factor in the offsets for each against your other earnings, liabilities, and assets). The answer is not always the same for everyone.

As far as setting up the "tiered" entities, this is not always necessary.

As an abundance of caution, you can do this (it generally makes no difference for your tax purposes, but it can make a difference for liability as I will discuss). If one of your sub-entities were to suffer a loss (for example a negligence claim), the creditor could sue for damages against that entity. However, the other entities would not be liable for that loss, only that one.

You see this a lot with property management companies (landlords that own more than one property), they will set up an LLC for each property, then have another LLC as their property manager. This makes sense for that type of entity as these are each individually fairly high value assets (you don't want to lose one due to a loss by the other), and there is a risk of loss (a negligent tenant could easily destroy a home, or a tenant could be injured on one of the properties), you wouldn't want to lose all of the properties due to a single home's loss.

As long as the landlord in the above example had a reasonable insurance policy on the homes, there is little likelihood that the "corporate veil" would be pierced (his business entity would be "adequately capitalized") and the creditor would be left to collect against the insurance policy and whatever assets belonged to that LLC. The landlord's other LLCs would be permitted to continue doing business.

As far as your company(ies) are concerned, you will want to speak with a local attorney for a formal risk evaluation (we can only provide "general legal information") but if the risk of loss is relatively small, and you believe that you have reasonable insurance or assets to cover foreseeable claims, it may be simply too cumbersome and unnecessary to create the tiered entities in the way you have described for your particular business operation. (But this is a business judgment call you must make, and a local attorney is going to be the best resource to provide you with formal advice on this issue).