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It is now common knowledge that Delaware is the first choice when establishing an LLC or Corporation. However, I often get asked whether it is okay to conduct multiple businesses through one LLC or Corporation, or whether multiple LLCs or Corporations should be operated for each business. It is often called a holding company structure or an “umbrella” company, and you can think of a structure where a holding company is created at the top of the management structure to control other companies, and a separate company is established for each business division below it.
For example, let’s say a founder establishes an LLC with a mobile gaming business as its main business purpose, but later decides to expand into a new business, a real estate platform service. Since these are two completely different types of businesses, you may wonder whether the company can provide both services under its existing LLC. Although it may seem vaguely legally safe and good to own multiple companies for each business, the additional costs of maintaining multiple LLCs cannot be ignored. That’s why some companies choose to operate multiple businesses simultaneously under one LLC or Corp. In this case, they often use a separate business registration name called a “DBA (Doing Business As)” to operate the additional business under a different name.
Problems of conducting multiple businesses under one corporation
However, running multiple businesses under one corporate name obviously has several drawbacks.
The biggest disadvantage is that if a lawsuit is filed against one of the businesses, the assets of other business divisions may also be at risk. As a result, from the perspective of the management of the entire company, this means that the company may be exposed to a higher and more comprehensive level of liability risk, and if one of the businesses is subject to legal liability, other business divisions of the company that are completely unrelated to that business may also be subject to liability. In the above example, if a real estate platform service business is conducted without establishing a separate LLC or Corp and, for example, is involved in a huge legal lawsuit due to failure to obtain a real estate brokerage license, all of the company's assets earned through the existing game business may also be at risk depending on the outcome of the lawsuit.
Therefore, most companies prefer to establish a new corporation for each business division. For example, if you establish and operate a separate LLC or Corp for each business division, you can separate the debts and liabilities of each business and spread the risk, which is very effective for risk management. Of course, it is true that as the number of corporations increases, the establishment costs of each corporation, annual maintenance costs, franchise taxes, etc. are incurred, but if you are protecting the most core business while at the same time taking on experimental challenges with new businesses with high risk, it can be seen as worth it in terms of risk management for the company as a whole.
Strategy for establishing a separate legal entity for a new business
When you want to expand into a new business, establishing separate entities is traditionally the most recommended strategy. That is, if you can create a separate corporation or LLC for each division of your business, each product line, each service provided, and each property you own, the assets and liabilities of each entity will be completely separated, protecting each other in the event of a lawsuit. However, since dividing your business into too many entities can be more detrimental in terms of increased operating costs or inefficiencies than in terms of asset protection, it is important to consult with an expert to divide your entities into appropriate categories.
However, when establishing multiple corporations, it is important to clearly establish the relationship between each corporation from the time of establishment. Most founders have received advice from various channels on how to divide the corporations themselves, so they establish corporations for each branch or each division, but they establish a structure in which all corporations are 100% owned by the founder. In this case, if the founder is removed from the relationship diagram, it becomes a situation in which several unrelated companies are gathered together. In other words, if the founder is removed, it means that there is no power to unite multiple corporations, and investors who expect and want to invest in the overall synergy between each business may see the company as having an unstable governance structure.
So in many cases, a structure is adopted where one parent company is established at the top of several corporations, and several related corporations are established under each business division. Each related corporation shares the same holding company and can operate its business in a unified manner according to the business decisions of the top management or board of directors who are the owners of the holding company. It is also possible to share manpower or assets among the related companies or provide services at appropriate and reasonable prices, while the assets of each individual corporation can be isolated and protected from each other.
That's why experts, based on decades of experience, recommend the Delaware holding company structure as a strategic way to not only safely protect the individual assets of the owners, but also to protect the assets of each individual legal entity owned by the holding company from exposure to each other's risks.
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