It is quite common for a small (or large) business owner to own multiple business entities. Sometimes, there will be one entity that holds real estate, which is leased to and used by another entity (with common ownership) that takes care of the operations. Or, there may be a parent entity which owns multiple subsidiary entities which each own one particular property.
Such entity structures are fairly common, to help protect business assets. One purpose of such a structure is to prevent a lawsuit or creditor of one entity from reaching the assets of a sister-entity. However, if certain precautions are not taken that goal may not be accomplished, and the assets of the other entities could be at risk. As the band The Offspring would say, “you gotta keep ‘em separated.” This blog explores a few things that should be done to help minimize that risk. It is important to consult an attorney about your specific situation and company structure, as this list is not all-inclusive.
Obviously, if you wish to separate business assets between multiple entities, to help minimize risk, it is important to actually keep the assets separated. You need to be deliberate and consistent in which assets are owned by which entity. One step is obviously to make sure the title / deed to the asset, when appropriate (like with real estate), is in the name of the correct entity. But, then you also need to make sure it continues to be treated as being owned by the correct entity. When filling out tax returns, listing assets on financial statements, etc., you need to make sure to keep the right asset(s) with the right entity.
Separate Books, Finances, and Records
One of the most important things to do is to ensure that the company books, finances, and records for each entity are all kept appropriately separate from other entities. Since each company is its own entity, it needs to operate as its own entity. If one entity shares a bank account with a sister entity or the records are all combined, it can become increasingly difficult to argue that they are indeed separate entities. When paying bills, make sure you know which entity is responsible for the bill, and pay that bill from the correct entity’s bank account. Also, each entity’s finances should be kept separate from the individual owner’s personal finances. If that is not done, it could put the owner’s personal assets (like their home) at risk if a lawsuit or creditor were to come knocking.
Part of operating separately is making sure that each entity has its own email domain (i.e. “…@FirstCo.com;” “…@SecondCo.com;” “…@ThirdCo.com;” etc.). While that is an important first step, the more important part is to ensure that you use the appropriate email for the appropriate communications. In other words, if you are going to be communicating with someone on behalf of “FirstCo, LLC”, you need to make sure that you are using your “…@FirstCo.com” email address. If you are regularly using your “…@SecondCo.com” email address to do business on behalf of FirstCo, LLC, it becomes harder to argue that they are separate companies, which can put the assets of the unintended company at jeopardy. It can be hard to manage multiple email addresses, so make sure that you know how to select which email account you are sending from and that you double-check which account it is sent from before hitting send.
Modern corporate structures involving multiple entities can be a good way to divide and protect assets that would otherwise all fall under one entity. But, if certain formalities and steps are not taken to maintain that separation, it can put the assets of one company at risk from a lawsuit or creditor of a separate company. If you own multiple entities, talk with an attorney at Goosmann Law Firm, PLC, in our Sioux City, Omaha, and Sioux Falls offices to evaluate what steps need to be taken to protect your wealth and help you spend time on what is worth it.
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