[jjoe]

Regarding this:

Most small software companies have a single entity and only choose to spin out when a new product becomes a truly independent operational unit, when it receives investment, or (for branding purposes) if it ends up eating the business that spawned it.

Is there any legal ramification to "converting" product X, originally under the umbrella of Y LLC, to its own new X LLC?

Thanks

[davismwfl]

This requires legal and accounting advice. I have done it twice and gotten different advice both times because the situations were different.

IANAL or Accountant, but the basic rule I was told was that if there are expenses or revenue in Y LLC for product X then you must take specific steps to legally transfer it to X LLC so that both entities are protected and it is as close to tax neutral as possible. But if you just started creating product X and Y LLC doesn't have any booked revenue or costs associated to it then it is totally different as there is nothing traceable between product X and Y LLC.

So, it depends. In my case for the one where we went through the most hoops, the new LLC "acquired" the Product from the original LLC in a tax neutral way, but contractually (basically an asset purchase agreement). And the Agreement stated the new LLC was taking responsibility for all liabilities past and future in relation to the product etc. It wasn't expensive or hard to do right, just took a little extra help.