How to Set Up Divisions in an LLC
LLC owners always think of expanding their business through addition of new divisions. There are more risks in adding division to the business then the expected advantages.
When your business is growing you will think of adding more divisions to properly expand it across states, towns and counties. Before adding a new division, it is important to understand the advantages and disadvantages of setting up divisions in your LLC.
Why you might want an LLC division
Most of the entrepreneurs who operate an LLC, add division to the LLC to properly expanded across various markets. Some key reasons behind edition of a new division in an LLC are,
- When an LLC is launching a new product or service line
- When an LLC or a business wants to deal with a particular geographic region or wants to handle a particular market segment.
When adding new divisions to your LLC it is important to change the internal structure of LLC because you have to modify the operating agreements through legal paper work that how the new division will be running. However, it is simpler to add a new division as compared to totally starting a new LLC or operating a new line of business.
How LLC divisions work
When you add a division to the LLC you clearly differentiate between that particular division and the whole entity. This gives LLC owners a chance to track the progress and growth of overall entity and its new division.
You can think of a division as a separate department within an LLC or entity. Same as departments operate under one entity and support each other a division is something similar which acts to increase the reach of a business to new markets.
Advantages of an LLC with divisions
Here are some advantages of adding a division to an LLC,
Cost Effective
It is less costly and time taking to add a new division to the existing LLC than creating a totally new business. It requires a lot of time, energy and final resources to form a corporation, LLC or partnership but comparatively you will not require that much amount of money and time to add a new division to the existing LLC.
Less maintenance
When you add a new division to the existing LLC you do not have to worry about its maintenance expenses because it only adds a few new filings and disclosures for that particular division. When you are going to pay the taxes, you do not have to pay for all individual divisions you can pay the taxes on one entity only.
Testing new business ideas
You can easily and quickly test new business ideas through addition of a new division to your LLC. You can start the operations of division right away as soon as you add it to your existing LLC.
Shared resources
You do not need extra resources to run the new division of your LLC because the same resources which support your existing LLC can also be useful for the new division. For example, if you are launching a new product or service, you can use the same marketing channels and market segments to effectively reach potential customers for your new division.
Disadvantages of LLC Divisions
Here are some critical challenges and disadvantages that LLC owners face when adding divisions to the existing business,
Liability risks
An LLC offers protection against limited liabilities. But when an individual adds a new division to the existing LLC, then there are chances of liability risks from the divisions that may influence the parent company. Let’s say the division of an entity faces a lawsuit then chances are the risks of lawsuit will also affect the image of original business that manages the new division.
One business entity
There may be separate internal books for each division and LLC but the risks of any kind effect entity and divisions equally. A loss in one division will affect the profitability of entity as a whole. When a division of an LLC is struggling to make profits, it disappoints the investors and the business may go bankrupt or lose potential investors.
Amendments to LLC operating agreement
The LLC owners will have to change the operating agreement of the entity when they want to add new llc members to the additional division of LLC. The current working process and operating agreement will be changed by the approval of all current llc members to make these kinds of amendments while adding new division to the existing LLC.
How to set up LLC divisions
When you have analyzed the pros and cons of adding new division to the LLC then the process of additional divisions becomes simpler. Here are the important steps when you are thinking to add a new division to your LLC,
Establish new trade name
When you are adding a new division to your LLC with a different trade name then you will have to file for legal name according to the requirements of the state. Each state has a different kind of procedure when processing the addition of a new division to the existing business. In some States you are also required to file for a DBA (doing business as).
Separate accounting systems
You also need to keep separate accounting books and financial transaction’s records for new division. It is important to understand that despite keeping separate accounting books you are required to file your LLC as one entity when Internal Revenue Service IRS require it for any kind of auditing.
Open a separate bank account
You will also need to create a separate bank account for your new division to easily track the progress and flow of financial resources. This makes it easy to separate the profits of new division from parent company. You need to remember one important point that if your new division is running under a different trade name then the name of parent company then you will require a bank account different from the LLC and you will have to make the appropriate fillings first.
Obtain permits and licenses
When setting up a new division make sure that you have acquired new permits and licenses required to run your business according to the state, city or town. Whenever you find specific permits and licenses relevant to your business structure immediately file for permits.
Update your LLC operating agreement
You also need to make amendments in the operating agreement when you are making any change in the entity like addition of a new division. Let’s say if you decide to bring on board a new member to run the new division in your entity then you need to make changes in the operating agreements to properly state the role of new member.
Adding new divisions to the existing LLC is the simplest and easiest way to expand the reach of your LLC and business. This can help your business and LLC to introduce your brand to new market segments across various geographies and market niches.