Ask HN: Should each of your products register as their own business?

22 points by itsthisjustin 9 years ago | 7 comments
I'm just about to publicly launch http://paynote.io. Since this is a tool meant for small agencies and freelancers, it's currently "owned" by my agency as a DBA. Knowing full well the tax headache having a bunch of EINs is, I've always had my products legally fall underneath my consulting agency. What is normal for a serial entrepreneur who is working on multiple "startups" or products?
  • patio11 9 years ago
    Define "normal." I have three LLCs (four if you count one in Japan for purposes of being able to pay myself on payroll now that Starfighter exists); that's probably on the high end among most of my peers. Most small software companies have a single entity and only choose to spin out when a new product becomes a truly independent operational unit, when it receives investment, or (for branding purposes) if it ends up eating the business that spawned it.

    Reasons to segregate:

    1) The single biggest one is that it firewalls the liability of the businesses from each other. Whether this is important or not for you depends on what the businesses are doing: if it's Regular Internet Stuff then your E&O policy is probably good enough in terms of risk mitigation, but if 1+ of your products are in highly regulated spaces (hello HIPAA, finance, etc) then putting them in their own LLC isn't a crazy solution.

    2) If you're religious about doing not just the paper ownership but the business accounts separately for each business, that makes eventually selling or otherwise disposing of them much, much easier. Otherwise you're looking at weeks of work and/or very fun professional services bills when you decide to do the division later.

    3) If you have co-founders or investors, or the prospect of getting co-founders or investors, separate legal entities are going to be pretty much required. You don't want them to accidentally get ownership of your side projects; they don't want to own your side projects (ownership is a risk; they know the risks they're signing up for and don't want additional sources of uncontrolled unknown risk).

    4) A minor factor, but there is non-zero social friction involved in "We've been talking about my trading name of $FOO but remember that the invoice/contract/etc will be from $BAR, LLC."

    Reasons to not segregate:

    1) It's a lot of extra work.

    2) There's a running cost to keeping an LLC open, both the yearly fees and the operational complexity of maintaining separate books, accounts at various providers, and (if you're doing things in a complicated fashion) keeping up appearances with regards to the LLCs being formally separate from each other.

    As an ex-consultant with some accidental knowledge of the payments space: I would be doing double-plus firewalling between any payments startup and anything I'd lose sleep about losing, and I would be happily writing a sizable check right about now to a lawyer rather than taking HN's advice about my compliance obligations and potential sources of risk.

    • jjoe 9 years ago
      Regarding this:

      Most small software companies have a single entity and only choose to spin out when a new product becomes a truly independent operational unit, when it receives investment, or (for branding purposes) if it ends up eating the business that spawned it.

      Is there any legal ramification to "converting" product X, originally under the umbrella of Y LLC, to its own new X LLC?

      Thanks

      • davismwfl 9 years ago
        This requires legal and accounting advice. I have done it twice and gotten different advice both times because the situations were different.

        IANAL or Accountant, but the basic rule I was told was that if there are expenses or revenue in Y LLC for product X then you must take specific steps to legally transfer it to X LLC so that both entities are protected and it is as close to tax neutral as possible. But if you just started creating product X and Y LLC doesn't have any booked revenue or costs associated to it then it is totally different as there is nothing traceable between product X and Y LLC.

        So, it depends. In my case for the one where we went through the most hoops, the new LLC "acquired" the Product from the original LLC in a tax neutral way, but contractually (basically an asset purchase agreement). And the Agreement stated the new LLC was taking responsibility for all liabilities past and future in relation to the product etc. It wasn't expensive or hard to do right, just took a little extra help.

      • itsthisjustin 9 years ago
        Really appreciate the break down. From a firewall perspective due to it being a payments app, I'm fairly well taken care of in that regard due to my relationship with the payment partners. However I think you do bring up a good point about having a line of separation for legal purposes.
      • mesozoic 9 years ago
        I wouldn't worry about it until you have assets in one entity to protect by having separate LLCs
        • itsthisjustin 9 years ago
          If I'm moving towards getting funding or need to sign compliance documents for the business, is there any downside to signing as my agency with a DBA vs a standalone LLC?
          • ProblemFactory 9 years ago
            If you are getting funding, then you will certainly need a separate LLC. The agency will have many deals and contracts with people you have worked with, and the investors will want these to be separate from the actual product they are funding.

            But it might be wise to wait until the funding is almost-confirmed before starting with this. The investors may also have specific requirements on where and how the LLC is registered, and you may need to do it over again if you do something else right now.