Lets say I have multiple software products. Should I create a company for each product or should I keep it under one company? What if the company does consulting work also? Also, the products are pretty unrelated to each other.
keeping it under one company is a better idea…
Are the products are closely related;the same people work on all products; the channels of distribution are the same or similar; etc… If so, you might as well leave them in a single entity. The main reason you would put them in a corporation or LLC would be to try to not expose one product line to the liabilities of another product line. But if they are all closely intertwined, then it is likely that a creditor could pierce the corporate veil and get through the entities anyway.
If the products are really separate lines of businesses and the revenues, costs and cash flow can readily be segregated, then it may pay off. The next question, then, is whether the potential liability of these products is potentially great enough to justify running separate companies, including maintaining separate bank accounts and carefully allocating costs, including overhead and administration, to the particular company. If there is not much risk in the products, there may not be much incentive to separate them.
If you are in the U.S., one thing to keep in mind in this analysis is that if you have each of the products in a single member LLC owned by a common parent, then you may at least be able to avoid filing multiple tax returns since the SMLLCs are treated as disregarded entities. This is one of the key differences when you are doing the [URL=“http://www.limitedliabilitycompanycenter.com/llc_vs_s_corp.html”]LLC vs S Corp analysis.
Finally, you need to look at the value assets you are protecting. Even if there is significant risk involved in the products, what is the value you are potentially saving by separating the risks into separate silos? Is the value reasonable when compare to the costs you will incur to protect the asset from potential creditors? Assuming that the corporate existence of the main company has been properly maintained, you already are protecting your personal assets. Is it really worthwhile to further divide up the corporate assets?
In some cases, the answer will be yes, but I imagine that in most cases, keeping the products in a single corporation or LLC will provide adequate protection and that separating the products into separate entities will not be justified.
Many companies will keep multiple related products under a single company. For example, take into account Adobe. They have multiple products, ranging from Photoshop to After Effects to Audition to Dreamweaver. They are all different products but still pretty related (all production software).
I think that if the products are related, then you should keep them under the same company. For instance, if you were going to sell a vacuum cleaner and a broom, I wouldn’t recommend making two companies because they are relatively similar (cleaning products). If you were going to sell a vacuum cleaner and then a car, then I would make two companies.
At the same time, though, you don’t want to lump all your products together. I would make individual product pages that keep the site’s theme but are devoted to a different product. Example : Photoshop Extended v. Dreamweaver v. Audition.
Got it?
~TehYoyo
I’m curious about that last part. Why would a corp/LLC that operated a number of closely related businesses be more likely to be pierced than any other entity?
I didn’t say that a single corporation or LLC operating a number of closely related businesses would be more likely to be pierced than any other entity. I said that multiple corporations or LLCs operating what is essentially a single intertwined business are going to be more likely to be pierced than multiple corporations or entities running businesses that can each stand on their own.
Here is an example of what I mean. Let’s say you have one manufacturing plant and you manufacture gas-powered garden equipment such as lawn mowers, garden tractors and hand-held cultivators. You have only one plant with one assembly line. You market the products all under the same brand and sell through the same garden supply stores. The same assembly line workers make the products, the same salesmen sell them, and the same administrative and accounting staffs handle the back end.
Because every product is a potential major liability waiting to happen, you set up three corporations - one for mowers, one for tractors and one for cultivators. You keep meticulous records, allocating labor, sales expenses and overhead on a reasonable formula, you send out separate invoices from each company for only their products, and you keep separate bank accounts.
Even with all those precautions, I think that it is possible, if not likely, that a court would treat the corporations as one entity. In practice, there would be too many points where you simply can’t keep them separate. Advertising multiple products in one brochure; the buyer for a garden supply chain who testifies that the salesman represented Brand X, not three companies; etc…
Is is possible that someone could keep intertwined product lines so perfectly separated that a judge would rule that the assets of Brand X Tractor Company and Brand X Cultivator Company are not available to pay a judgment against Brand X Mower Company. Theoretically, I suppose so. But as practical advice, many businesses have difficulty keeping a strict separation between personal and business expenses. The idea that a typical business could really separate closely-intertwined product lines into separate companies that would prevail against an attack by a good personal injury attorney is pretty farfetched.