Discovering a new, complementary business vertical can be a fantastic opportunity for growth. However, pursuing this new vertical raise important questions. Should it be legally intertwined with your current company? What if the business models differ, like a consulting agency versus a high-growth tech play? If you need to recruit partners paid in equity, should they receive equity in the current company? How do you establish a new legal entity? Here are key considerations when spinning off a new vertical.
Separate Legal Entities for Risk Mitigation If your business verticals have distinct risk profiles, consider separating them into different legal entities. This strategy mitigates risk, as adverse events in one vertical won't affect the others due to the protection of limited liability.
Different Business Models, Different Legal Structures Different business models may warrant different legal structures. For a consulting agency, an LLC or S Corp could be ideal due to pass-through taxation and simpler governance. Conversely, a high-growth tech vertical might benefit from a C Corp structure, facilitating institutional investment and potential sale advantages, such as Qualified Small Business Stock. Additionally, consider ease of offering equity to workers, which is simpler with a C Corp.
Reinvesting Profits for Growth While LLCs are popular for pass-through taxation, there are scenarios where a C Corp's double taxation is beneficial. For instance, if reinvesting profits back into the business is crucial, a C Corp allows retaining earnings within the business, potentially at a lower tax rate than individual taxation. Always discuss tax strategies with your accountant, and if you need one, feel free to reach out.
Conclusion
Navigating the complexities of spinning off a new business vertical requires careful planning and informed decision-making. From determining the appropriate legal structure to managing reinvestment strategies, each decision can significantly impact your venture's success. Seeking professional advice is crucial to setting up your new vertical for success. If you have any questions or need assistance with entity formation, restructuring, or other related matters, our firm specializes in advising Los Angeles-based entrepreneurs. Contact us today to discuss how we can help you strategically grow your business and achieve your entrepreneurial goals.
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