You may think that your business is protected because you made the prudent decision to operate your business as a corporation or limited liability company. You may also hold annual meetings, file the appropriate documents with the Corporation Commission, and maintain other corporate formalities.
And yet, your business is still at risk if you fail to separate your business ventures into separate entities.
It often starts innocently enough. You develop an offshoot of your existing business — a new product line, a second business location, or a related business venture. It’s easier to run the offshoot business as part of your existing business, so you run revenues and expenses through your existing bank accounts and charge expenses to your existing company.
When you operate too many business ventures out of the same company, you place all of your ventures at risk. Avoid these risks by segregating your business enterprises into distinct entities.
A simple example illustrates the reasons for segregating your enterprises.
Two brothers, Pete and Fred, are the sole owners of a single limited liability company. The company’s holdings include two furniture stores, two clothing stores, and four buildings where the stores are housed. The company faces a number of unnecessary risk, including the following:
* An unproductive store can hinder or even bankrupt the company, even if all other stores are profitable
* An unprofitable product line can hinder or bankrupt the company, even if the other product line is profitable
* The entire company is liable for any injuries that occur at one store
* The entire company is liable for any defective products sold by one store
By separating each store and building into a separate limited liability company, Pete and Fred could treat each portion of their business enterprise as what it really is – a separate and independent business undertaking. Some of the advantages include the following:
* Liability remains with the specific entity responsible for the risk
* If one product line becomes unprofitable, the balance of the company is unaffected
* The brothers can sell all or part of any of their business enterprises
* The brothers can charge their stores fair market rent to use their buildings, thus achieving significant tax advantages
* The brothers can give an ownership interest in one of the stores to a key employee
Separating business ventures increases accountability. Each business venture either makes or loses money on its own merit. A wildly profitable store is not dragged down by an unproductive location. Separateness allows you to make business decisions based on the merits of each unit.
Separated business entities create wealth.
Learn about the Ten Fatal Mistakes by downloading a free copy of my new e-book, “Ten Fatal Mistakes That Business Owners Make (And How to Avoid Them).” If you take steps to avoid the Ten Fatal Mistakes, your business will boom.
I am, first of all, a husband and father. Rebecca and I have been married 23 years; we have four children ages 21, 19, 18, and 15. My family is my greatest joy in life. For 24 years, I have practiced business law in Arizona, the past eleven as the managing partner of Gibson Ferrin, PLC. We help businesses and their owners meet their business and personal goals. My practice focuses on the intersection between intellectual property law and employment law. I help businesses prosper by properly managing their intangible assets.
I am licensed to practice law in Arizona only. Though I believe the advice in BiziBoom™ is based on sound legal principles, the law of your jurisdiction may be different. The advice given on BiziBoom™ is informational only; it may not be applicable to your specific situation. You should seek the advice of competent counsel in your jurisdiction, someone who knows the particular legal requirements of your jurisdiction. Until you have signed an engagement letter with Gibson Ferrin, PLC, neither the Firm nor I are acting as your legal counsel. Nothing on BiziBoom™ creates an attorney/client relationship between you and the Firm.