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Question about one LLC running another
Posted on 1/5/15 at 9:41 am
Posted on 1/5/15 at 9:41 am
I've heard of holding companies, but not sure how exactly they work and what they're legally allowed to "hold".
So for example let's say there is an ongoing food related business. We'll call it a taco truck. It's not, but for sake of anonymity it will be. Current taco truck business is up and running, sales tax id, credit card machine acceptor, bank accounts, vendors health inspected, etc. Everything is smooth running at this point.
If I want to buy a 50% share of business along with the current owner, but don't want to be added to his current LLC for liability reasons what is the best way to go about that? I don't think there is any liability there, but this is just to be safe.
I'd hate to have to pretty much start over when this one is up and running good. Is there a way he and I can start a new LLC, or some other legal business entity and have us run his current business through our newly formed entity?
So for example let's say there is an ongoing food related business. We'll call it a taco truck. It's not, but for sake of anonymity it will be. Current taco truck business is up and running, sales tax id, credit card machine acceptor, bank accounts, vendors health inspected, etc. Everything is smooth running at this point.
If I want to buy a 50% share of business along with the current owner, but don't want to be added to his current LLC for liability reasons what is the best way to go about that? I don't think there is any liability there, but this is just to be safe.
I'd hate to have to pretty much start over when this one is up and running good. Is there a way he and I can start a new LLC, or some other legal business entity and have us run his current business through our newly formed entity?
4
Posted on 1/5/15 at 10:02 am to BullredsRus
Correct me if im wrong....but couldn't your LLC be a "member" of his LLC?
Nothing should have to change...
Nothing should have to change...
Posted on 1/5/15 at 10:07 am to Coach Guidry
You may be right, but I don't know. So you're saying I would create a separate LLC with just myself and add that as a member to his current?
Posted on 1/5/15 at 10:15 am to BullredsRus
I'm assuming what we will call the "operating LLC" is currently a single-member LLC (i.e. only one owner).
You could certainly create a new LLC (we will call it the investment LLC) which then holds an interest in the operating LLC. The operating LLC will now have two members - the original member and the investment LLC. The LLC could elect to be taxed as a partnership, as a corp, or as an S corp (it can only be an S corp if your new investment LLC is single member).
Other options include:
You buying into 50 percent of the operating LLC, with some sort of hold harmless agreement for claims that arise before you became a member
Form a new operating LLC where he contributes the assets of the old LLC, and you contribute new assets (probably cash)
Also, just to clarify, what exactly liability issues are you worried about? Unless there is some horrible activity that causes the court to pierce the veil, your liability is limited to your investment. I'm not sure if you can structure it so that your investment is never exposed. If a liability bankrupts the company, you are out of your investment, but you should be able to protect your other assets.
If liability is a concern, get good insurance.
You could certainly create a new LLC (we will call it the investment LLC) which then holds an interest in the operating LLC. The operating LLC will now have two members - the original member and the investment LLC. The LLC could elect to be taxed as a partnership, as a corp, or as an S corp (it can only be an S corp if your new investment LLC is single member).
Other options include:
You buying into 50 percent of the operating LLC, with some sort of hold harmless agreement for claims that arise before you became a member
Form a new operating LLC where he contributes the assets of the old LLC, and you contribute new assets (probably cash)
Also, just to clarify, what exactly liability issues are you worried about? Unless there is some horrible activity that causes the court to pierce the veil, your liability is limited to your investment. I'm not sure if you can structure it so that your investment is never exposed. If a liability bankrupts the company, you are out of your investment, but you should be able to protect your other assets.
If liability is a concern, get good insurance.
This post was edited on 1/5/15 at 10:18 am
Posted on 1/5/15 at 10:51 am to BullredsRus
Just start your own LLC and have that LLC buy into and become a member of the existing LLC. You'll then have 2 layers of liability protection. It's that simple, don't over think it. Good luck.
Posted on 1/5/15 at 11:51 am to cwill
Why is someone letting you "buy in" without taking some of the risk?
There isn't much risk anyway. The current llc protects the members the same way 2 layers of llc would.
The talk you should be having is with your CPA....depending on how the current owner does the distributions, you may not want 2 llc's involved. MAybe someone here knows more in reference to that.
There isn't much risk anyway. The current llc protects the members the same way 2 layers of llc would.
The talk you should be having is with your CPA....depending on how the current owner does the distributions, you may not want 2 llc's involved. MAybe someone here knows more in reference to that.
Posted on 1/5/15 at 12:08 pm to GeeOH
His money is at risk in his initial investment, that's all that matters. He's going to join the existing LLC through his won LLC. 2 layers of protection matter, especially when he sounds to be more or less a passive investor. Say the managing member doesn't dot all his i's or cross all his t's and the llc gets sued and the corp veil is pierced...well our friend here would be exposed personally if he didn't have his individual llc as the member. Now the plaintiff would have to get through that LLC, too, in order to get to his personal funds.
This post was edited on 1/5/15 at 12:09 pm
Posted on 1/5/15 at 12:31 pm to cwill
Understood...also, why the hiding of the business type? It could make a difference as well to determine if needed.
Posted on 1/5/15 at 1:31 pm to cwill
Thanks everyone. Cwill, that's exactly what I'm worried about (him not crossing all his t's and dotting the i's). Nothing more. If he were to get in trouble with an audit from last year, or a lawsuit from some other issue I wouldn't want to be implicated there. I don't anticipate anything, but just to be sure.
How would taxes work there with two LLC's? I'm trying to figure out how he does the taxes now (whether it's tied to his personal or if it's a seperate return). If it's tied to his personal as a schedule C how does that work going forward? I'd think we would need a seperate return just for business, or would we each tie our share of income from the business to our own personal taxes?
How would taxes work there with two LLC's? I'm trying to figure out how he does the taxes now (whether it's tied to his personal or if it's a seperate return). If it's tied to his personal as a schedule C how does that work going forward? I'd think we would need a seperate return just for business, or would we each tie our share of income from the business to our own personal taxes?
Posted on 1/5/15 at 2:34 pm to BullredsRus
You'll have to get a tax guy to give you the exact rundown. LLCs are flow through entities so it's taxed only at the individual level. So the funds would pass through LLC1 to your LLC2 then to you. It would probably be treated as a disregarded entity (sole proprietorship) on your individual tax return.
Posted on 1/5/15 at 3:29 pm to cwill
Sounds good. Again, thanks for the insight. I'm going to talk with a tax guy later this week but just wanted to have a better idea of options to bring up for that meeting.
Posted on 1/5/15 at 3:47 pm to BullredsRus
quote:
How would taxes work there with two LLC's? I'm trying to figure out how he does the taxes now (whether it's tied to his personal or if it's a seperate return). If it's tied to his personal as a schedule C how does that work going forward? I'd think we would need a seperate return just for business, or would we each tie our share of income from the business to our own personal taxes?
The operating entity itself will no longer be eligible for a Sch C treatment. It's going to have to file it's own return (unless you choose a joint venture treatment... which I would not recommend).
So it's going to file as a S corp or a partnership (and pass out the income/loss to the members) or it's going to file as a C corp and pay it's own taxes.
If it files as an S or a partnership, it's going to issue a K-1 to your LLC (the holding LLC). Since your LLC is a single member, you can make it a disregarded entity, so you don't have to file any tax returns for the holding LLC.
The end result is the K-1 from the operating LLC gets reported on your personal 1040 Schedule E. Even though the name on the K-1 you receive is not your name, instead, it is the name of your holding LLC.
Posted on 1/5/15 at 5:09 pm to LSUFanHouston
What about the OP forming an LP with the guy and become a limited partner? The other guy is the general partner that runs the operations and holds the liability while the OP would be the limited partner and can invest in the business and share the profits or loss, but cannot be active in the business?
Just asking.
***Wait, I assumed the OP wasn't going to participate in day-to-day operations.
Just asking.
***Wait, I assumed the OP wasn't going to participate in day-to-day operations.
This post was edited on 1/5/15 at 5:13 pm
Posted on 1/5/15 at 8:09 pm to BullredsRus
Several good ideas on layering liability exposure here but what I would also pay attention to is your legal relationship with other members.
Spend the money, with a business attorney not a CPA, that locks down exactly what you want in the operating agreement. I'm sure there are some boilerplate examples online you could look over.
Spend the money, with a business attorney not a CPA, that locks down exactly what you want in the operating agreement. I'm sure there are some boilerplate examples online you could look over.
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