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2 Entities - Keep them Separate

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foleyt

Junior Member
What is the name of your state? Colorado

We have an S-Corp that sells industrial equipment. We are thinking about starting a separate entity (probably an S-Corp) that would only deal in Installations. There's a lot of potential risk when dealing with installations (injury to people and equipment).

We have to make sure the two entities are as separate as can be...with that said, are we going to blur the lines if we share employees/software? If we share our building, is it a good idea that the new entity pays rent to help separate them?
 


adjusterjack

Senior Member
There's a lot of potential risk when dealing with installations (injury to people and equipment).
Then you buy the appropriate insurance.

are we going to blur the lines if we share employees/software?
Yes.

If we share our building, is it a good idea that the new entity pays rent to help separate them?
I can't say if it's a good or bad idea. It is, however, common for the owner business to lease to the subsidiary.

As to keeping the businesses separate, I'm not sure I see a need for it. Many businesses sell and install what they sell. They just buy the appropriate insurance rather than complicating their lives with costly gimmicks that don't actually change the risk.

Consult a business attorney and review your options.

Or, consult a commercial insurance agent on how best to insure against the risk of injury to people and equipment. You might find it more cost effective going that route.
 

LdiJ

Senior Member
What is the name of your state? Colorado

We have an S-Corp that sells industrial equipment. We are thinking about starting a separate entity (probably an S-Corp) that would only deal in Installations. There's a lot of potential risk when dealing with installations (injury to people and equipment).

We have to make sure the two entities are as separate as can be...with that said, are we going to blur the lines if we share employees/software? If we share our building, is it a good idea that the new entity pays rent to help separate them?
If you really need to share employees, then what the current S-Corp should do is bill the new S-Corp for some of each employee's time, with a little bit of a profit on the deal. The same would apply to the software. Yes, the new S-Corp should pay rent and have their own designated area/basic office equipment.
 

Taxing Matters

Overtaxed Member
We have to make sure the two entities are as separate as can be...with that said, are we going to blur the lines if we share employees/software? If we share our building, is it a good idea that the new entity pays rent to help separate them?
The first thing to address here is that S-corporation a federal tax term that tells me how the entity is taxed. It could be a corporation, LLC, LP, LLP, etc as organized with the Colorado Secretary of State or even a general partnership at the state level (which doesn't have to be registered with the state) and each is a bit different in the protection offered, etc. Which kind of entity is this? Also, you refer to "we" indicating there is more than one owner. Who are the other owners of the business?

Second, using the same employees is not a problem, but the best way to ensure they are kept separate is for each entity to pay the employees separately for the work the employee does for each one — separate records, checks/direct deposits from different bank accounts, separate W-2 forms for each one, etc. I don't favor the employee leasing concept that LdiJ suggested for this. Using the same software isn't a problem, lots of businesses to do that, but they each should have separate licenses that they pay for separately for that software. And the one entity should pay rent to the other for space used at its building and ideally the space for the new entity in the building would be distinct from the space the other company uses. It would be a good idea to consult a Colorado business attorney for help to ensure that the way you run it will ensure the separate existence of both firms is respected.

Now, while the businesses would want to be kept separate for liability purposes, for federl income tax purposes you can arrange for the two companies to be treated as just a single entity such that the income and losses of the businesses are combined and only one Form 1120-S needs to be filed. You'd do that in one to two ways. The first is by making the new entity a LLC that is wholly owned by the existing S-corporation. A single member LLC is by default disregarded under federal tax law and treated like a division/branch of the of the S-corporation owner. The second way to do this is by making the new corporation a wholly owned entity of the S-corporation and then electing for the new entity to be treated as a qualified S-corporation subsidiary (QSUB) on using Form 8869. Whether you want the two firms to be regarded as one for income tax purposes and which of the two ways to do it depends on the details of your situation and you may want to see a tax attorney about that. Note that even with one of these arrangements, you need to have separate bank accounts, use the proper form for distributions/contributions of cash and property between the two, etc, to ensure each is regarded as a separate entity for liability purposes under state law.
 

LdiJ

Senior Member
The first thing to address here is that S-corporation a federal tax term that tells me how the entity is taxed. It could be a corporation, LLC, LP, LLP, etc as organized with the Colorado Secretary of State or even a general partnership at the state level (which doesn't have to be registered with the state) and each is a bit different in the protection offered, etc. Which kind of entity is this? Also, you refer to "we" indicating there is more than one owner. Who are the other owners of the business?

Second, using the same employees is not a problem, but the best way to ensure they are kept separate is for each entity to pay the employees separately for the work the employee does for each one — separate records, checks/direct deposits from different bank accounts, separate W-2 forms for each one, etc. I don't favor the employee leasing concept that LdiJ suggested for this.
Your favored way works if there are no employee benefits that are based on full time (rather than part time) employment. If there are, then each company paying the employees separately becomes a bit of a problem for the employees.
 

Taxing Matters

Overtaxed Member
Your favored way works if there are no employee benefits that are based on full time (rather than part time) employment. If there are, then each company paying the employees separately becomes a bit of a problem for the employees.
That can be dealt with too in the arrangement I suggested. How that would be done depends a bit on the details of how the work would be split, etc.
 

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