Under what circumstances does it make sense to create another business?


13

If I have a consulting business, does it make sense to start another business (new legal entity) if I want to develop and sell a product? What if I have business selling B2B but want to start selling to consumers? Do it all under one umbrella, or not?

Starting another business has expenses associated with it. Are there any advantages to doing it? Under which circumstances would you do it, if ever?

Business

asked Jan 12 '11 at 02:20
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Sumrak
168 points
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2 Answers


1

There are two main reasons to create a business.

The first is investment driven. A business is a legally-based, familiar and trusted way to bind together assets and operations. It exposes costs and revenues. So it allows partnerships, investment, performance-based or equity-shaped reward structures and the rest. None of this is impossible in a single legal entity, but separation will often be the cleanest way to achieve goals of this type.

The second is risk management driven. The most obvious shape this takes is that a limited liability company does what it says on the tin - limits liability. In other words, the cost of failure can be contained. Other related issues are, for instance, enabling the special risks of regulatory oversight and other statutory compliance to be restricted to the sphere of operations that necessitates them. Again, there are other ways to achieve these same ends, but separation of businesses will often be the simplest.

Against this, there are cost implications, and also legal and practical restrictions, mainly relating to the assignment of costs, revenues, assets and liabilities between businesses. But as we're talking about startup contexts, these latter restrictions tend to be less relevant.

What does experience tell me?

I can think of an entrepreneur who lost everything because she wouldn't separate two lines of business into distinct legal entities. At a time of opportunity, the different capital intensities caused problems with the bank and investors, slowing growth. And then when one division was hit hard by economic issues, both were dragged down.

But then in another situation, I saw a joint venture company fail because the new business team never managed to gel, but this only became apparent to the parent companies when the venture had burnt a year of time and half its cash.

So judgement comes into play here. On balance, I suggest making the directional decision as early as possible, but putting it into practice as late as is prudent - typically triggered by some factor such as signs of success or the need to access external financial or human capital.

answered Jan 12 '11 at 20:51
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Jeremy Parsons
5,187 points

0

Depends. On how you want to position you in the market and on how realted the things are.

My business has 3 different income areas in two totally seaprated business areas.

answered Jan 12 '11 at 02:46
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Net Tecture
11 points
  • But it's still the same business? Have you ever ran into any issues because of that and wished you'd have two separate businesses? – Sumrak 8 years ago
  • No. Two are relatively common, the other is totally different but does not have customers in the classical sense. – Net Tecture 8 years ago

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