Every day you have new ideas for products to sell or new brands to promote. So many products, so little time.
But as you're diversifying your offerings, you don't want one bad mistake to accidentally taint the rest of the business that you've got going well, so many business owners start thinking about opening additional entities. And chances are that if you're reading this post, you've already created one business, and you realize that's it's not quite as hard as you had first imagined.
Let's take a hard look at some of the key advantages and disadvantages before you open that second (or third or fourth) ecommerce business.
Pro #1 - You Can Vary Ownership
This is arguably the best argument for creating a second entity.
Maybe you started your online store selling baby supplies, but that developed into a relationship with a key supplier who has an idea to work with you to make a secondary dream of yours come true. Instead of giving up ownership in the original business (which you created all on your own), it may make sense to create another independent company that's owned by the both of you.
Many institutional investors specifically choose to build a portfolio of ecommerce businesses, particularly for unique brands, and this segregated ownership may be worth any additional costs or inefficiencies you would otherwise get when consolidating overhead and management.
Pro #2 - It Can Limit Legal Liability
Another solid reason for creating a separate legal entity is to limit your legal exposure. Each separate and properly formed legal entity exists in its own bubble so the actions of one entity cannot generally touch what's going on in another company. (Note: make sure you're talking to an attorney when you're setting up new businesses to ensure all your t's are crossed and i's are dotted.)
Many owners with multiple businesses may choose to isolate their product liability for one type of product (i.e., baby products) from a distinctly different type of product (i.e., kitchen appliances), and this can be achieved easily by creating separate entity.
Pro #3 - It Segments Your Business
If you have multiple brands, different lines of business, and/or want to segment your business in specific ways, creating another ecommerce business may be a great way to achieve that.
One common scenario we've seen is when you have one business that manufactures products and the other entity resells the products.
Another scenario is when you have very different products in very different industries and want to keep them separate. In that case, you can launch each one in its own business entity.
Different tax treatments can also prompt some people to split out a business. You might start one business as an S Corporation but later come up with a new idea for a new product line that would be better sold within a C Corporation structure. Entrepreneurs may decide to set up a separate entity to take advantage of having the best structure for each line. (Note: your tax CPA is the one to talk to about these things.)
We've also seen many entrepreneurs who have built several companies with the specific intention of selling them quickly. Perhaps you have one unique brand that you want to grow, develop, and then sell off. If you wrap that brand in its own legal entity, when it comes time to sell, you can quickly and easily transfer the ownership of the business' assets, or even the entire business itself, to the buyer. There's no need for the buyer to hassle with determining the value of the brand while it's commingled with a bunch of other stuff that they may not want. It's all neat, tidy, and ready for sale as-is.
Con #1 - It Increases Complexity
Having two businesses can be one of those times where 1 + 1 = 3.
Keep in mind that if you have multiple entities, you now probably care not only about the performance of Company A plus the performance of Company B but also about the performance of both of them together. This means you'll need one set of books for each company, but you may also need to start thinking about consolidated financials.
I encourage you to forget about trying to keep track of multiple legal entities within the same set of books. That's a huge no-no from the Internal Revenue Service, and from a legal perspective, you can end up "piercing the corporate veil" which will mess up the legal liability protection you were trying to get in the first place. (Again, go talk to an attorney.)
You will need to open separate bank accounts and use different credit cards for each entity just like you should've segregated everything from your personal accounts when you opened your first business.
Having multiple businesses makes things more complex, and any additional complexity will make it harder and more time-consuming to run your business sanely and efficiently.
Con #2 - It Multiplies Your Compliance
Remember that every separate legal entity is standalone. That means each hurdle you have to jump through for one company you'll now have to jump through twice. Setting up and maintaining accounting files, opening separate bank accounts, and getting insurance policies are just the beginning. You'll also have federal and state income tax returns, payroll tax returns, and more... all likely doubled when you open your second entity.
And probably the worst piece of all this is that thanks to the economic nexus laws from the South Dakota vs. Wayfair ruling, you could now have the responsibility of registering, collecting, filing, and remitting sales tax in anywhere from one to 45 states. For each entity. Blech.
Con #3 - It Multiplies Your Costs
When you open a second entity, not only does your compliance double, but your costs double as well.
Each business would require its own Business Operating Policy (~$600/year), and any additional insurance would only apply to that business.
Many tools (cloud inventory, Amazon tools, email marketing, CRM, repricers) won't work well for multiple companies, and this could quickly multiply your monthly spend on tools.
If both your entities are S Corporations, you'll now need to take a reasonable salary from each which means payroll needs to be set up (and processing paid) for both companies.
If you've got two entities, you're now likely filing separate income tax returns (both federal and state... and possibly MANY states). Your tax CPA is not going to file all those extra returns for free. The cost could come up to thousands of dollars each year.
And don't even get me started on the sales tax returns. If you're filing in all 45 states that collect sales tax, you're paying roughly $20k per year for Company A plus another $20k for Company B.
The costs can really add up if you're looking at running multiple businesses.
Con #4 - It Segments Your Business
Yes, you read that right. Segmenting your business is both a pro and a con. Although you *can* segment your business by creating a new entity, that's definitely not the only way to do that.
By using a generic or non-product company name, you can have various brands and URLs under the same company and split out the financial data in your accounting system to track each one. You can use tracking categories (in Xero) or classes (in QuickBooks Online) to create mini profit and loss statements that show performance by product line while still seeing performance for the company as a whole - all in the same set of financials and with no extra work.
However, if you have multiple entities, you should have multiple sets of books (as discussed above), but that makes it more complicated to pull all the information together into one cohesive view when evaluating performance.
What's the Best Approach?
We believe in keeping things as simple as possible. Ecommerce is complex enough without unnecessarily creating new challenges.
Unless you have a clear, specific reason to open up a separate business (varying ownership, portfolio of businesses ready to sell, etc.), the costs related to opening a new business typically don't outweigh the benefits of doing so for most entrepreneurs.
It is possible to have a single business entity with multiple channels (Amazon.com, Amazon.co.uk, Shopify sites, etc.), different brands and products, and different URLs. With the right knowledge and experience, you can track the financial performance of your business in a way that allows you to effectively manage your business all within one entity.
For more information, please check out our video!