One Basket or Two?
It’s common for business owners and managers immersed in making the business successful to have thoughts that start with, “You know what else we could do…”
For example, the owner of a successful bakery realizes the potential in distributing her famous cupcake mix through other retailers. A web developer decides he could increase his market share by selling products or software.
The first hurdle is deciding whether the new initiative launches under the existing business entity, or if it requires a launching a new company. Do you put it in the one basket you already have, or use another one?
It’s a big decision that will set the course for your new brilliant idea. To help you decide, consider these factors:
Apples and Oranges, Or Apples and Apples
First, consider how far the new products or services are from your existing offerings. If they are entirely different, a new business entity may be indicated. Conversely, if your current business is in the same general market area and targets the same type of customer as the new idea, then it could fit perfectly into one company.
Smart, Cheap Insurance
A key reason why business entities are used by growing businesses is that they separate the business liabilities from the individual owners, therefore giving the owners some protection. In the same way, using multiple companies for differing business operations provides a fence between the companies. This means the liabilities of one company are not the liabilities of the other. Think of it as a smart, cheap form of insurance for you and the companies. If one of the two ways of doing business carries with it a lot of liability that could place significant assets of the other company at risk, you will want to divide the two.
What Do You Call It?
A new initiative can have its own branding, product name, and marketing strategy while still fitting within the existing company. What’s important to ask yourself is whether the combination of the two brands will confuse consumers. For example, the bakery shop owner wishing to sell cake mix through other retailers could easily name and brand her cake mixes as something different than her shop name without confusing consumers – Better Batter by Betsy’s Bakery. However, if the web developer wanted to sell cake mix branding within his existing company would seem silly and confusing to consumers, Better Batter by John’s Websites.
Ownership or Sale
How you want ownership, profit, or loss distributions organized is another question that will help you decide on whether to launch a new initiative within an existing company or to start a new one. If you think it could get messy or complicated to account for profit and losses among the owners for each piece of the business, then launching the new idea under a new company may be best. Also, if one of the divisions is something you are thinking would be great to sell down the road, then setting it up as a separately company will make that transaction much easier and profitable.
What inputs will be necessary for the new product or service? If there are raw materials, offices, staff, or intangible assets required only for the new initiative and not the existing business, then it having them as separate companies could make sense. Vendor disputes are a great example of the liabilities previously mentioned that it would be smart to have protection for one company affecting another.
Tracking expenses and income for two divisions within the same company can certainly be done, and with some attentive accounting the shared expenses between the two can be divvied up. However, having two companies with separate bank accounts, payrolls, and tax returns can provide greater clarity which will be helpful in gauging the success of the individual pursuits.
Sometimes the ease of continuing to push all of your efforts through one existing company will be tempting, even when wondering whether it should all be pushed into one basket. If you have trouble deciding, seek a trusted advisor and ask the basket question, keeping these factors in mind.