Here’s one of my most frequently asked questions: “How much stuff should I put into one business structure.
With income-producing activities, the answer is often “one.”
Say you’ve got more than one area of expertise, and work in multiple fields, for example. You could set up a separate business structure for each field (probably an S or C Corporation, or an LLC taxed as either an S or C Corporation) for each activity.
But that means three sets of business records to maintain, three separate bank accounts, three separate bookkeeping files, and three tax returns to manage, etc. It’s going to get cumbersome pretty quickly!
So is it necessary? The answer is (Diane’s favorite) … “it depends.” If one of those activities is something that requires you to operate through a Professional Corporation (doctors, lawyers, dentists, CPAs and real estate brokerages, for example), then the answer is most likely going to be “yes.” That’s because the Professional Corporation has special rules around ownership which could become a problem down the road if you wanted to add in some other owners. PCs are often taxed a bit differently (higher) too, so you may be paying more tax than necessary.
On the other hand, if your activities don’t require you to be in a PC, then the answer may be “no.” For tax purposes the income will be treated the same – it’s all ordinary income in the eyes of the IRS. It will certainly make record-keeping easier than trying to divide your mileage reimbursement and home office deduction three ways. And unless there is some kind of particular liability that attaches to one of your activities, then the liability is going ot be about the same too.
If this describes your business activities, then you may be better off setting up a single business structure and using d/b/a designations to keep things separate in the eyes of your client. I’d suggest using a general name and then using d/b/as to get specific. Getting a bill for web site design from Kitty’s Pie Company may be a bit disconcerting for your IP clients – but a bill from ABC, Inc., d/b/a Kitty’s Web Design should be just fine.
My rules of thumb for passive-income businesses are quite different though. I’ll talk about passive-income business structures in my next post!