Is it legal to do business with oneself?

 

Having more than one company might be difficult. Discover how to fund your own company without breaking the law.

What you’ll discover:

Can my two enterprises acquire products or services from each other?
Is it lawful for me to utilize the profits from one firm to cover the expenditures of the other?
Can I use the same accounts to run many businesses?
What are the dangers of conducting business with my own companies?
Can my staff from one firm assist me with my other?
Is it lawful for my enterprises to share resources?

Entrepreneurs often own many businesses. Occasionally the firms might operate together or complement one other. When one firm needs assistance, the other companies may consider pooling resources. The legality of pooling resources or conducting business with your own firms may be determined by how the businesses are formed. The following section covers how to do legal business with oneself.

Can my two enterprises acquire products or services from each other?

Certainly, two separate firms that you wholly control may purchase products or services from each other, but there are some restrictions. If you are not the only owner of both enterprises, you should carefully examine the rights of your partners or shareholders.

If you established the companies as independent legal entities and own 100% of each, they may interact with each other like any other company. Your firms may acquire products and services from each other as long as the transaction is not prohibited and is properly documented. You may create a Business Plan for each firm that demonstrates how they will purchase and sell to each other in the long run so you know how it will function.

Separating your enterprises is a smart idea for legal and tax reasons. Although establishing two independent limited liability businesses may seem to be a lot of effort, this strategy safeguards each company’s assets and revenue from any legal danger that might damage the other.

Is it lawful for me to utilize the profits from one firm to cover the expenditures of the other?

Yeah, but how you do it makes a big difference. Everything is determined by how the firms are constructed or organized. If all of your enterprises are run by one LLC or by you as a single proprietor, then using revenues from one to support another may simply be part of the overall business aim of the LLC or sole proprietorship under which both firms are run.

You still have various possibilities if your enterprises are independent and different entities. Nevertheless, unlike managing multiple firms as a single LLC, you presumably cannot easily transfer money from the lucrative to the suffering company without risking tax implications.

An owner draw is the most typical technique for business owners to transfer funds from one company to another. This is when the proprietor of a firm withdraws cash from their own company in order to essentially pay themselves. Profits are regularly withdrawn by business owners for personal purposes. They may utilize the cash for other business projects after they have withdrawn them.

Another typical approach is to lend money to a failing firm. You are not required to charge interest on the loan, but you may do so. If you do, be sure to report the interest on your taxes. However, keep in mind that firms with joint owners, members, partners, shareholders, or other stakeholders may be reluctant to assist another individual owner’s suffering company unless they are compensated.

If your enterprises are distinct entities, the law may compel you to treat them as such. To lessen legal risk, the thriving firm might make a loan to the failing one. The loan would be documented in a Loan Agreement or Promissory Note, which would include any interest rates and payback schedules.

Can I use the same accounts to run many businesses?

When it comes to combining finances, the structures of the firms may be important since each company has its own legal personality under the law. The sort of business structure you pick may have an impact on how your company is taxed, how you can mix finances, and what it is required to perform by law.

Sole proprietorships, partnerships, S corporations, limited liability companies, C corporations, and B corporations are common company formations. Here are some specifics on the most typical company structures:

It is a sole proprietorship. If you register your business as a sole proprietorship, you and the business are legally the same entity. The sole proprietorship is taxed on Schedule C with your own Social Security number, but you have no legal protection if you are sued.
Company with a limited liability. An LLC provides limited liability protection, which means it restricts your personal legal accountability for the business’s obligations. An LLC is state-registered, has an Operating Agreement, and a distinct tax and legal identity from you.
Corporation. This framework also separates your corporate identification from your personal identity. It offers its owners personal legal protection and pays its own taxes on Form 1120.
LLC with a single member. The SMLLC, often known as the “disregarded entity,” has a single owner and minimal legal liability. For personal risk and certain tax reasons, it is deemed independent from the owner.

It is great practice to have separate business bank accounts for each firm you manage.

What are the dangers of conducting business with my own companies?

The hazards of having your own firms deal with each other are primarily determined by how the businesses are formed and operated. When all enterprises function under a same organizational structure, this becomes less of an issue. Generally, company owners may get into tax or legal issues for:

Maintaining inadequate or no records of their dealings.
Misappropriation of finances.
Profiting from shareholders or partners.
While withdrawing or transferring cash, you may avoid paying taxes.

If your LLC or company transfers money from the business account to your personal or other business accounts without proper record-keeping, creditors may sue you personally. Removing an LLC’s or corporation’s personal liability protection is referred to as “piercing the corporate veil.” Piercing may be caused by three factors:

Unreasonable fund mixing (moving money between accounts).
Failure to do business in a legitimate and separate manner from personal problems.
Utilizing company funds for personal purposes.

Can my staff from one firm assist me with my other?

Companies may be allowed to share personnel, but the process might be complicated legally. Even if an employee works for the same owner, your firms may be independent organizations. As a consequence, the two companies may be regarded as joint employers. Two or more firms that share ownership of an employee are referred to as joint employers. As a consequence, under the Fair Labor Standards Act, each employer is required to pay the minimum wage and overtime compensation, but not for the same labor. In addition, each may be liable for workers’ compensation and unemployment insurance.

Horizontal joint workers work for two firms that have a connection, such as franchisees. They may also be vertical, in which one firm is the direct employer and sends personnel to a second company, such as a staffing agency. Direct employers hire the employee and pay their compensation as well as any applicable income taxes. The second company, on the other hand, benefits from the employee’s services without having to pay those fees, albeit they may still pay the other firm for the work supplied.

Is it lawful for my enterprises to share resources?

Certainly, however if your firms are formed as wholly independent organizations, it may not always be a quick and clear procedure. Organizing your enterprises under a single parent company is one strategy to ease resource sharing.

If you need to share a lot of resources across the firms, you could open a distinct subsidiary company of your primary company. A subsidiary firm is one that is dependent on its parent company, or main company. Having a subsidiary instead of two independent firms may allow you to exchange resources more easily.

Fortunately, the LLC structure makes it simple to establish a parent-subsidiary connection. Subsidiaries may safeguard your assets without the paperwork required by the state to incorporate a separate business. You choose which firm will be the parent company and form it like you would any other LLC. A subsidiary, on the other hand, is often run as a distinct firm. Therefore, you are unlikely to be able to transfer assets from one business to another in order to avoid tax or legal liability.

A Joint Venture is another option for enterprises controlled by the same person. This permits two or more organizations to agree to collaborate on a certain business aim. Joint ventures may be advantageous for completing certain tasks or combining resources. The ratio of responsibility and profit sharing between the parties does not have to be equal.