There is a multitude of different types of classifications that can be used whenever a person wants to set up a business. But the main difference between them is the varying degree of liability that they each have. Some will defer any legal action or debt onto the main owner or shareholder. Others act as separate “beings” that can hold assets in their name without any fallback to another person.
The main reason that so many types of businesses are available is that it gives business owners flexibility to modify and create different structures that best fit their needs. Sometimes, this means separating everything out into different holding companies though. That way, if any problems arise with the main entity, most of the assets will not be affected because they are owned by a separate entity.
But while this creative business planning works very effectively, it also creates a unique set of challenges regarding how to manage all the entities. So to help, the following is a list of five tips to try out:
Multiple-entity companies have the ability to transfer funds between each other through the use of loans. This is advantageous because if the funds in one of them get tight, they can simply borrow some from a more profitable entity. However, handling all of the transactions can be very confusing. So each entity should have its own separate cash-flow statement and another one that is tied together with all of the other entities. This will act as a checks and balances system to make sure that all of the transactions are accurately recorded.
By law, each entity must have its own separate set of books. This prevents fraud and the avoidance of paying taxes. But when a company has several sets of books to maintain, this complicates the process because most types of accounting software doesn't connect the various entities together. To solve this problem, it is best to invest in financial consolidation software.
Most of the entities that a business sets up act as holding companies. That means, their main job is to hold on to a key set of assets. One might be used for all the buildings. And another one could hold all the vehicles. Then, the main company simply rents out the assets from the holding company. To keep everything straight, it is crucial that more than one set of eyes reviews everything regularly. So many companies assign some of the entities to different accountants that they employ. Still, they must collaborate on all their work regularly.
A multiple-entity business should perform regular self-audits to check over all their transactions. The timing of the audits should be based on a period that falls before the closing date though. For example, most businesses close their books on the last day of the month. So they may want to set up an audit of the entire month's transactions a day or two before this. The period prior to the closing date can't be too far in advance because some of the transactions will be left out of the review. And if there are any problems with them, they can't be changed after the closing date.
Whenever possible, a business should avoid overusing their holding companies. This will reduce the amount of paperwork that they each have. It can also prevent the likeliness of an audit from the tax department because a holding company isn't supposed to be very profitable. If there are too many loans and payments going through it, it will appear to have a higher cash-flow than what is supposed to be reported.
In conclusion, a multiple-entity business is a unique way to protect assets and reduce liability. But it also increases the workload of the accounting staff that has to monitor all of the transactions between the entities. So it is helpful to use special software and cash-flow statements to monitor them all as separate entities while still being able to see how they tie together as a whole. Whenever possible, the transactions of holding companies should be limited too. And lastly, don't forget to do regular reviews of all the accounting work to make sure that it stays accurate.