So, you want to introduce a new product or service. Maybe market to a new audience. You’ve already been down the road of starting a business, so you know what it takes to bring an idea from concept to reality to dollar signs.
What you’re really asking is “how do I do new stuff without messing up my old stuff?”
First things first—legal compliance. Before anything else, you’ll want to determine if the changes you plan to make are subject to any new or different regulations or taxes. (After all, you don’t want to celebrate your expansion with a slew of citations or penalties.) For instance, if you go from selling fresh-squeezed juice in your cafe to bottling your juice for sale, you may be making the leap from food service to manufacturing or wholesale. This could require a whole new set of paperwork and processes for your business.
Once you’ve done your legal legwork to ensure your new activities are in compliance, you can move on to the big question: How much separation do you want (or need) between your current business and your expansion? For example, do you need a new name? Separate asset protection? What options are there?
There’s a few. Most businesses take one of the following three approaches, which each offer a different degree of separation and asset protection:
1. Do nothing (no separation, no protection)
2. Get a DBA (separation but no protection)
3. Form a new business entity (separation and protection)
Do nothing: The cheapest, easiest option is to just continue business as usual—no special paperwork or changes to your business entity. Just roll out your expansion. Your new product or service will just be one more thing your existing business offers.
This works great if your expansion isn’t a far stretch from what you’re currently doing, doesn’t add any significant new liabilities, and is not outside what your audience would expect. For example, if you already sell coffee at your bakery, you could probably expand into the whole cafe/coffee culture and add a line of espresso drinks without any additional changes to your business. If your expansion is something a bit more radical, however, you’ll likely need to step things up.
Get a DBA: A DBA (a “doing business as” name) gives your company the ability to advertise and operate under another name without starting a whole new business. DBAs can be used to separate out new product lines, which can make bookkeeping and sales comparisons easier. Also, if your current name doesn’t appeal to your new target audience or doesn’t convey the image you want to present, a DBA can be pretty useful.
For instance, imagine your company, Hippie Headwear Ltd., makes fun and fashionable floral headbands. You’ve recently started making neckties and dress shirts too. To appeal to a more corporate crowd, you adopt the DBA “HH Businesswear” for your new product line.
DBAs are great for separating out lines of products or services, but they have their downsides as well. First, they’re typically not free. You’ll usually have to file paperwork and pay fees to your state or local governing body. And the biggest downside of all? No separate liability protection. Imagine the organic dye in your dress shirts runs when washed—and ends up ruining hundreds of loads of laundry. When you’re inevitably sued, any damages wouldn’t be limited to HH Businesswear—all of Hippie Headwear Ltd. would be liable.
Form a new business entity: If separate liability is essential, forming a new business may be the best option.
Imagine you own a dine-in restaurant, Seasonal Seafood LLC. You decide to expand your business by opening a new fast-casual location with a drive-thru. Your newly-trained staff accidentally spill piping hot crab bisque on a drive-thru customer who suffers third-degree burns. The customer successfully sues Seasonal Seafood LLC. Damages awarded dramatically exceed your insurance—and you end up losing both locations.
If each restaurant location had been in a separate LLC, liability would have been limited to the restaurant where the incident occurred. When the risk level is high and you have a lot to lose, it’s often a good bet to isolate and limit your liabilities as much as you can.
Since separate liability can be such an asset, why not form a new business for every new product you create? Long story short, it would get really expensive. Every time you form a new business entity, you need to file formation paperwork with the state. Most states also have annual fees in the form of reports or franchise taxes (or both). And that’s not even getting to business licenses or other fees your company might incur. It can easily cost hundreds of dollars to form a new business entity.
Whatever choice you make will be a bit of a gamble—whether it’s a new business, a DBA, or nothing at all. Is it better deal to save a few dollars? To expand your marketing potential with a new name? To protect your existing business from new liabilities? Overall, it comes down to what you feel your business needs—and what you’re comfortable with.