How to Set Up Divisions in an LLC

When a limited liability company (LLC) wants to establish a new line of products, expand into a different region, or target a specific market, sometimes it will create a new business division. Making a new division of the company instead of starting a new company involves less paperwork, but it also carries risks. 

What is a business division?

A business division is like a compartment. It holds a single line of business with its own management, financials, and employees but is still part of your initial business.

If you own an LLC and want to launch a new line of business or target a particular geographic region or audience, you may start a separate business division for this new aspect of your business. While it’s not a separate legal business entity, it can have its own business bank account, budget, set of books and accounting system, employees, managers, etc.

Advantages of Creating a Company Division

The primary advantage of creating a division instead of a separate company is that it involves less paperwork and fewer government fees. Creating a separate LLC for your new venture would mean, among other things, filing another Articles of Organization and associated state paperwork, paying initial and ongoing fees for an additional LLC, and doing separate taxes.

Creating a new division instead bypasses those hassles. However, you’ll likely need to get a doing business as (DBA) name for the new division. Also known as a trade name, assumed name, or fictitious name, a DBA name acts as an alias for your business. Nearly all states require one if you’re doing business under a name other than your legal name.

For example, if Katie’s Catering, LLC wanted to open a division focused exclusively on children’s birthday parties, it would need a DBA to represent itself as “Bigtime Birthday Bonanzas.”

Cons of Creating Divisions of a Company

Forming an LLC usually protects the personal assets of the owners (called “members” in an LLC) from the liabilities of the business. But it doesn’t protect the divisions in a company from the liabilities of the other divisions. If one division is sued or goes into debt, the assets of the other divisions are also at risk.

It’s also worth considering that, if the division really takes off and you want to sell it and keep your original LLC, selling a division is more complicated than selling a separate business.

Division vs. Subsidiary

The main difference between a division and a subsidiary is that a subsidiary is a separate legal entity, whereas a division is still part of a company.

A subsidiary is a company that is owned by another company. The parent company appoints managers and/or directors while holding at least 51% of the company’s shares. The parent company can save money on its taxes by consolidating subsidiary profits and losses in a single tax return. Parent companies can keep subsidiaries private even if the parent company is public. Subsidiary creditors usually can’t touch the parent company’s business assets.

How to Set Up Divisions in an LLC

Step 1: Choose a name for the division

If you decide to use a DBA name for the division, make sure it’s available for use in your state. Different states have different rules about exclusivity for a DBA, but it’s always best to have one that’s unique.

Step 2: Update the operating agreement

You’ll likely want to update your current LLC operating agreement to reflect any changes brought about by the new division. For example, if you bring in additional members to manage the division, they’ll need to be listed in your operating agreement. Adding new members would have other implications, as well, such as how ownership and profits are divided among members.

Having a new division might also necessitate having new policies that the existing LLC didn’t require. All of this needs to be included in your updated operating agreement. 

Step 3: Obtain any necessary licenses or permits

If your new division is doing things that your current LLC isn’t, you need to make sure it has all the required federal, state, and local licenses and/or permits it needs to do so. If the division is in a new location, you also need to consider things like zoning permits. Our business license report can help you determine whether you have all the required licenses and permits.

Step 4: Open a separate bank account for the division

Business owners know opening business bank accounts is crucial in starting a company, as it helps further keep business and personal finances separate. Having a separate bank account for a new division helps you better track how the division is doing in comparison to the rest of the LLC.

Step 5: Hire employees or contractors as needed to run the division

You may need to bring in new people to run your division. If any of those people are members, you’ll need to update your operating agreement and your Articles of Organization by filing an amendment with the state.

Step 6: Keep accurate records of the division’s finances and activities

Keeping separate accounting and financial records for your division can help you track how well each division is doing on its own. Remember at tax time, though, you’ll only be filing returns for the company as a whole, not each division. The ZenBusiness Money app can help organize your finances and track tax-deductible expenses.

Step 7: Consider forming a subsidiary LLC

Consider forming a subsidiary LLC if the division operates in a different state or engages in activities that put the rest of the LLC at risk. The LLC structure is intended to protect the members from personal liability, but it doesn’t protect one division of an LLC from the liabilites of the others.

If you think the new division is a risk to your existing LLC, you may want to start a separate LLC as a subsidiary, one that’s owned by your existing LLC. This way, your original LLC enjoys the same liability protection that any LLC owner would.

It’s important to note that different states have different laws regarding LLC divisions, so it’s advisable to consult with a lawyer before setting up a division in your LLC.

Other Considerations for Creating Business Divisions

While creating business divisions may require less red tape than starting a new business, you’ll still want to keep the following things in mind:

Decision Making

It’s important to establish clear lines of authority and decision making for each division within the LLC. This can be done through the operating agreement, which should outline the operating structure of each division.

Financials

Each division should have its own financials and records. Despite that, you only need to worry about filing the state paperwork and paying the filing fees for your primary LLC. A possible exception would be DBA paperwork and fees for each division with a DBA. The government will still treat your LLC as one company for tax purposes, though, regardless of how many divisions you establish.

Legal Compliance

Each division should be in compliance with all applicable laws and regulations in the state where it operates. This includes obtaining any necessary licenses or permits and following all relevant labor laws. If you choose a different name for your division, you’ll need to complete the DBA filings required by your state. Remember that while a limited liability company protects the members’ personal assets from liabilities associated with the business, individual divisions don’t offer the same liability protection from other divisions. All of your divisions within a single LLC are exposed to the same liability risks incurred by one division.

Auditing

It’s important to have a plan in place for auditing the financials of each division on a regular basis to ensure that they are in compliance with all laws and regulations.

Closing a division

It’s important to have a plan in place for closing a division if it’s no longer needed and to ensure that all assets and liabilities are transferred or dissolved in an orderly manner.

This is different from selling a division. If you have plans to sell a line of business in the future, creating a division may not be the best decision. Even with separate financials and business bank accounts, the divisions are closely intertwined and can be challenging to separate.

We can help!

If you’re looking to start an LLC, we’re here to assist. With ZenBusiness on your side, we can help ensure that everything is accurate and that you know what’s happening with your company every step of the way.

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.