Disclaimer: I am not a lawyer. This is just an idea I'm playing with and it's entirely possible I am missing some serious downsides. Feel free to tell me what I'm missing in the comments. :)

I don't recall who put the idea in my head, which is too bad because I'd love to give them credit, but an idea has been stewing in my brain for some time about the way software projects are treated from a business entity perspective. Certain industries, such as real-estate investments, construction projects, or movie deals, use a system of "nested companies" to handle distribution of liability and distribution of income. You don't see that system used often in software and I don't know why. I am in the process of working on a side project with another technology company and that is giving me an opportunity to give this a shot.

I see the steps as follows:

  1. Setup an LLC with one of the existing LLCs acting as the registered agent
  2. Draft up an operating agreement that considers initial technology investments by each party and lays out how future investments, management costs, and income will be distributed.
  3. Get a federal EIN through the same LLC that is the registered agent.
  4. Setup a bank account in the name of the new LLC.

I see the pros of this approach as:

  • Multiple parties are owners without having to divvy up ownership in the existing companies.
  • Liability is restricted to the new company protecting the parent organizations to some degree.
  • Having a defined, contractual distribution model in the form of the operating agreement.
  • If the project fails you just shut it down and get a nice clean break.
  • If the project is successful it could grow into an organization of its own or get acquired into one of the existing companies.

There are also downsides:

  • Initial paperwork.
  • Ongoing Bookkeeping.
  • Something I'm missing?

I think the pros out-weigh the cons, especially once you get up and running and ongoing bookkeeping is the only downside. If the project is successful you'll have no problem delegating that to external vendors or staff.

I am going to give this a shot and I'll report back how it goes. Feel free to drop me a line or comment if you think I'm crazy and/or missing a major considerations.

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