Why you Don’t Want to Own a Big Company
Many entrepreneurs have a dream of owning a big company. While big companies are fantastic (especially for the ego in some cases), there are advantages to owning multiple smaller companies instead. If, as an entrepreneur with many great ideas, you are inclined to build a large company by agglomerating multiple diverse ventures, here are five reasons to consider a holding company that owns separate business ventures.
- Asset Protection – By holding assets together in the same entity, while the entity might appear to be large and viable, in reality the assets may be placed at risk.
For example, assets may be at risk through litigation. If an entity gets sued because of one distinct business line or product, all the assets can be at risk in the event of a material adverse judgment.
Similarly, Entrepreneurs looking to grow businesses and sell them are put in a better position to sell the business line if it is not intertwined with other assets. Segregating assets avoids dealing with the headache of extracting or separating joint assets and contracts. For example, landscaping companies that have design/build and maintenance activities may benefit from separation of those activities and the corresponding contracts and other assets into two different entities if they plan to someday sell off only one side of the business or the other.
The same analysis applies to real property. If real property is owned separately from the business it provides the opportunity to maintain the real property and its income and appreciation without having to sell it separately or redeeding it out of the business in connection with the sale of the business.
- Fencing Liabilities – Entrepreneurs are risk takers by nature. As a result, however, economic risks taken in one line of business may negatively impact the viability of all an entrepreneur’s other ventures unless the liabilities are fenced. Likewise, liens or penalties imposed against one line of business will cloud the title of all the assets. If separate business entities are created and one entity is investigated or audited, the other entities remain clear of the suspicion of audit or investigation.
Intentional acts provide an additional example we have observed of the risks of a non-segregated corporate structure. When an entrepreneur owns more than one location and/or multiple franchises, one unlikely bad act at one location can cause an entrepreneur to lose every location if the locations/franchises have not been legally segregated.
- Cross-Collateralization – You can only have one first priority lien or mortgage per entity. If all your assets are aggregated, and you have a lien, then obtaining additional debt service means a second priority lien. If the assets are segregated into two or more entities, obtaining that additional debt service may be easier as a first lien is still possible for the lender who does not have to get in line behind existing debt.
- Employee Liability – An employee working in only part of the business may make a claim that impacts the entirety of the business when business lines have been combined. Workers’ compensation claims for a distinct line of business can potentially impact premiums across all lines of business. While separating employees between lines of business makes sense, an alternative strategy also exists whereby, if employees are to be aggregated, regardless of whether an entrepreneur has a large company or multiple smaller companies, there may be strategic legal advantages to aggregating those employees outside of any operating entity or entities in a separate management company.
- Preservation of business opportunities – Those who operate under government contracts or in highly regulated industries may be prohibited from certain business activities as a result or be subject to specific regulations. Segregation of business lines preserves the ability of an entrepreneur to avoid unnecessary regulation and to engage in a wider variety of economic activity. Similarly, certain contracts may require the payment of prevailing wages, and if businesses are aggregated, those wage implications can be detrimental and far reaching.
Those looking to maximize the benefits and to mitigate the risks, can implement a corporate structure that places each individual line of business in its own entity. A holding company or series limited liability structure are ways to accomplish these objectives.
Before implementing any business organization or engaging in any reorganization we strongly suggest business owners always contact a tax professional to coordinate that implementation and provide advice that will allow them to understand the tax implications and best achieve tax efficiencies while at the same time meeting the legal goals described above.
Jacquelyn Jordon Core and Michael T. Voytek are Founding Partners at Jordon Voytek, and April Slokan Oliverio is Of Counsel to the firm. They focus their practice on mergers and acquisitions, and corporate structuring and restructuring, including the formation of series LLCs. They are available to assist businesses of all sizes with general counsel services, meeting their day-to-day legal needs. Please contact Jacquelyn directly at Jacquelyn@JordonVoytek.com, or by phone at 304.777.0790, Michael directly at Michael@JordonVoytek.com, or by phone at 203.360.6232, or April directly at April@JordonVoytek.com, or by phone at 304.216.2119.