Startup Next Door

The Benefits of an Umbrella Company

March 1, 2010 by John Washam

I briefly mentioned using an umbrella company in 6 Tips to Picking a Great Company/Product Name, but I want to go a little further in explaining.

An umbrella company is one company name that you run all of your startups under. You may have 5 startups, all with different product names and domain names. By placing them all under the same main company name, you unify them in a way that has certain benefits.

In my case, ReadyPrompt is my umbrella company. It's registered as my business name, so all profits and losses are recorded in aggregate and taxes and expenses are paid using funds from the ReadyPrompt bank account. It makes it much easier than declaring multiple businesses and having multiple accounts. It also makes it easier to shut down an underperforming service without the need to report it in any special way.

Update March 29, 2010: I received a few questions via email from a reader considering merging their sites under an umbrella. Here was my response:

I’m glad you’re using a business and tax lawyer before you undertake this action. It’s the prudent way to go, and I’m definitely not as versed as they are. The reasons I decided to put my sites and business under the same roof was out of simplicity. Relieves the need for multiple bank accounts and simplifies taxes. I felt it was right for me since I’m a sole proprietor and simplifies my management of it. An important question you’ll want to ask your advisor is: what do I do when I decide to sell a part of the company? If you have 3 "properties" (sites or sub-businesses) and you want to sell one of them, there may be problems.

Considerations for sale of subcompany Y:

  • if Y is using a subdomain of your main company (y.company.com) instead of their own discrete name: www.Ycompany.com, since web traffic and pagerank will be tied to the subdomain version (or not depending on your server setup)
  • if your businesses share the same bank account and all those transactions are intermingled
  • if you share employees between the them: James does tech support for X and Y (does James leave along with Y?)

This is causing me to rethink a few things. Looks like I need to update the post for these sale considerations. Not a deal-breaker, just a more focused way of making separations between entities but still taking advantage of economies of scale.

Next post: securing startup funding from friends and family

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