Make sure your businesses have distinct legal identities

A businessman came to my office to discuss a management software he was offering. I liked his proposal on e-mail and looked forward to meeting him. But agreed the software was not suitable for my business now; may be later.

He asked to sell to me an investment policy for my children, handing me another business card indicating that he was a director of an insurance agency.

On the back of the card, it is indicated he also deals in used cars and car hire.

Out of curiosity, I asked him what exactly he does. He told me that he was a director of three companies, which he runs from the same office.

It is not uncommon to find small business owners who operate more than one business under one roof and often under one corporate entity in an effort to avoid multiple administrative and legal costs.

Such entrepreneurs pride themselves in wearing many hats. Some design two-sided business cards to cater for their interests. Others carry different business cards and some supply anything that can make money.

In theory, it is a wise strategy. However, this can only work if the two are closely related.

First, it is not wise to operate many small businesses to save on cost or take advantage of facilities. This is a poor structure of diversification and the owner risks spreading too thin. They became a jack of all trade and masters of none.

Do not start a business to supplement another that is struggling. Think of ways of making it profitable to stand on its own. If a business cannot make profit, abandon it and start another one.

It is advisable to start another business when the existing one is mature and profitable and can stand on its own.

At that level, one becomes a business owner — not self-employed — and hires competent staff to be in charge.

If your businesses have to share the same roof, they should have different staff and facilities, especially if they are not related.

Specialists advise that if an entrepreneur has two or more businesses that are different, such as a construction business and an insurance brokerage, and supplies, for example, it makes sense to keep them distinct.

There are several other challenges of combining two or more businesses under one legal entity. One is the concept of liability.

This is a challenge when one is sued or becomes mired in bad publicity, or debt. This would expose other businesses.

Maintaining separate operations is professional and a mark of authority in one’s area as opposed to gnawing at everything.

This kind of arrangement is also a source of confidence for customers who will know they are dealing with a professional.

In case you choose to sell or get financial assistance from banks or strategic investors, it becomes easier if businesses are run separately and not bundled together.

If you have several businesses all under one company, it’s difficult to distinguish them and to convey specific company information to a potential buyer or investor.

If you are sharing staff and other facilities or using the same bank account, it becomes more complicated.

Unless the accounting and financial aspects of the different businesses are adequately separated and managed appropriately, it might be difficult to tell which one is doing better than others and, therefore, is more deserving of greater resource deployment.

Mr Kiunga is the author of Challenges of Starting a Business and The Art of Entrepreneurship: Strategies to Succeed in a Competitive Market. [email protected]