When Multiple Business Entities Create More Problems Than They Solve for MSPs
▶️ Watch: Does Your MSP Have Too Many Business Entities?
Prefer to read? The key ideas from the video are expanded below.
It can be really tempting to think that having more entities—multiple LLCs, holding companies, subsidiaries—somehow makes your business more legitimate. Big companies like Coca-Cola have dozens of entities, so it’s easy to assume that’s what “real” businesses do.
But those big companies have complex structures for very specific reasons—things like operating in different regions, regulatory requirements, or isolating certain types of risk. For most small and mid-sized MSPs, having too many entities can create friction and costs that slow you down.
So when does an MSP actually need multiple business entities, and when are those extra entities just creating cost and complexity?
A Simple Test Before Creating Another Entity
The simple test I always tell clients is this: if you can’t explain to your spouse why you’re creating a new business entity, you probably shouldn’t.
My wife is really smart, but she’s a first-grade teacher—she doesn’t live in the world of accounting or corporate structure. But I can explain to her, in plain English, why my firm is an S corporation and it makes sense.
If you can’t do the same—if you can’t explain it clearly enough that a smart non-business person gets it—that’s a red flag. That may be a sign you don’t fully understand the reason yourself.
When Multiple Entities Actually Make Sense
There are legitimate reasons to use multiple entities.
Attorneys may recommend separate entities for liability-protection reasons, and that can be completely reasonable. You might separate an operating business from an entity that owns certain assets so the equipment or property is not sitting in the same company as the operating risk.
Or you might separate activities with materially different risk profiles. A classic example is a manufacturing company that also runs its own trucking fleet. The trucking operation carries a very different risk profile, so it can make sense to keep those businesses legally distinct.
Those are clear reasons for the added complexity.
Every Additional Entity Creates Friction
But every additional entity also means more:
· Bank accounts
· Credit cards
· Payroll runs
· Bookkeeping
· Tax returns
· Software subscriptions
All of that costs money, but more importantly, it creates friction.
Successful business owners talk about minimizing friction all the time. Friction slows your business down. It means more transfers between accounts, more confusion about which entity pays for what, more cleanup for your bookkeeper, and more time explaining your org chart to every banker, attorney, and new employee.
When you’re running six entities, it’s easy to get stuck in the mud. That drag can slow your growth far more than you realize.
Multiple Entities Do Not Automatically Create Tax Savings
A lot of owners assume multiple entities mean more tax strategies or savings. In reality, the structure itself can sometimes create a tax problem.
Here’s a common example. You split your business into two S corporations—one for operations and one that owns your equipment. The operating entity makes money, and the asset company shows a loss because of depreciation. You think, “Perfect—I’ll offset the profit with the loss.”
Except you may not be able to.
An S corporation loss is generally deductible only to the extent the owner has enough tax basis in that specific entity. If you don’t have enough basis in the asset company, those losses can be suspended rather than deducted in the current year.
That can mean a big surprise tax bill even though, economically, your overall business broke even.
Create Another Entity Only When It Solves a Specific Problem
There are still cases where another entity makes sense. For example, you may have a C corporation that exists for a specific tax or benefit-planning purpose. The point is not that multiple entities are always wrong. The point is that there should be a clear, understandable reason for each one.
Most of the time, when I see overly complicated structures, it’s not because someone is trying to make the business look fancy on an org chart. It’s because someone told them they should—maybe a well-meaning advisor, attorney, or friend—without them fully understanding the actual benefits or weighing those benefits against the costs and friction of running multiple entities.
So before you create another entity, ask yourself:
· What problem am I actually solving?
· Can I explain this decision clearly?
· Do the benefits really outweigh the friction and cost?
In my experience—and I’ve been CFO for a group of half a dozen related companies—it almost always gets more complicated than you think.
Create another entity because it solves a specific problem, not because complexity makes the business feel more sophisticated.
This article is for educational purposes only and is not tax or legal advice. Every business is different, and you should talk with your own professional about what makes sense for your situation.
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