Most of our clients plan to grow their business. They don’t want to stay stagnant and stay where they are. They want to create something bigger. Usually, they have legal entities involved. As we’ve discussed in an earlier blog, it’s smart to form a legal entity when you know that you’re going to be doing business to get that separation of personal and business liability. Most people start with this.
There’s some point the business starts to expand, and they start asking a lot of questions about, “How do I divide these entities? How do I treat this business, and how do I put all these pieces together as we grow?” Some people go to the extreme about it. They want to form a new entity for every operation in every portion of their business. This typically is not practical, more legally sound. The courts do recognize business entities. They are a fundamental part of American law.
Of course, we’ve talked in prior blogs about veil piercing and the fact that you have to run a business correctly in order to get the benefits of liability protection. Similarly, in order to make sure that you’ve set up multiple entities, you’re going to have to treat this entity as a separate business to avoid cross veil piercing among the entities. And you’re also going to need to show that they are indeed separate businesses. If not you may get consolidated under bankruptcy or other rules where a court is essentially going to say, “It’s great that you’ve formed these different businesses, but we really don’t believe that they are different. Therefore, we’re going to treat them as being one – the same,” so you want to be very careful.
A real question becomes, how do we work these pieces together in the right way? How do we make sure that we’re pulling all the different entities together in a way that’s protected, but also makes business sense? Well, there is no one set of answers. What we typically see is that we need to divide the business into unique line. What we really want to recognize is where the separate businesses are. If everybody in the business . . . if every business is doing the exact same thing and we try to set up a lot of businesses parallel with each other, we may be surprised later when we don’t get the liability protection we hope. You have a bit of a challenge or a lawsuit.
But if the businesses are doing distinct lines of business separate and apart from each other and treating each other as being independent entities, this means inter-company contracts and third-party type negotiated agreements between them. Then we start seeing the ability to get that legal protection. You want to really draw distinct lines based on logical business reasons and pull all the pieces together accordingly. No one business will draw the lines exactly the same, but we can grow on the principle we have and put together something that makes business sense for the business we need.
Talk to a lawyer you trust about getting the right structure for you and your business. Join us in the comments below and let us know about your experience. How and why did you structure your business the way you did? What made it make logical sense for you?
This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity. Freeimages.com/Photographer Kruno Knezevic.
About the Author
Shawn McBride — R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC. Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email R. Shawn McBride or call (214) 418-0258.
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