Newland's Business Notes

All Eggs in One Basket

Volume 8 Issue 5 -- September/October 2004

Recently, we received a call from a client that we’ll call Ace Trucking, LLC (“Ace”), a company formed by Newland & Associates about two years ago.  Ace, engaged in general trucking in Northern Virginia, had grown and now had an opportunity to become engaged in hauling automobiles. 

The client’s question was, should Ace form a second entity to cover the interstate transportation of automobiles?  The new activity would be called Ace Plus (“APlus”). 

In our January/February 1998 issue of this newsletter, we talked about segregating business risks, and the famous Lord Wadbottom’s desire to segregate the risk of investing in the colony of Virginia in order to protect his castle in England. 

The same reasoning motivates many of today=s business people to form corporations and limited liability companies (LLCs).  They want to insulate the business activity from their personal assets.  This means that if injury is caused to a customer or the public, the repercussions from that injury, in most instances, would stop at the business entity level and would not carry over to the personal assets of the business owner.

Because of the differences in business activities between Ace (local trucking in Northern Virginia) and APlus (long-distance, interstate trucking), it made sense for APlus to be a separate, new entity.  The owners wanted APlus to be different because it would be leasing trucks for long-distance hauling and it would have different workers and substantially different risks. 

For many years, large corporations have used separate “baskets” to put their "eggs" in.  Many large corporations set up separate entities for various purposes, such as to make it appear that a brand, such as Lem Phlug Bourbon, a special type of whiskey, is made locally in the hills of Kentucky when, in fact, Lem Phlug might be owned by one of the largest distilleries in the country.  In addition to presenting the appearance of a local activity, there are other reasons to set up separate entities.

Elmo B The Good Manager

Sometimes a business with several retail locations will discover that Elmo, one of its prized managers, is thinking of leaving.  Elmo may envision himself as the manager of his own store or chain of stores.  If he leaves, he could be a formidable competitor, particularly if he knows all of the customers and business contacts and if, as is all too often the case, there is no covenant not to compete. 

To accommodate Elmo, it might be advisable to set up a separate corporation or LLC to run the activities which Elmo is supervising.  By doing so, Elmo can receive a greater percentage of the profits and share in the equity of the entity of which Elmo is a part owner.  Instead of allowing a competitor to be formed, the new entity run by Elmo allows both Elmo and his current employer to reach a mutually beneficial accord.

New or Different Investors

Another reason for setting up a new entity might be to attract or accommodate new investors.  For example, a successful, local line of ice-cream might be expanding.  It may already have investors in Virginia, but among the current owners, some don=t want to expand into neighboring states.  Those who want to expand may (with the approval of the “stay in Virginia” group) allow a new entity to be formed in a nearby state, say West Virginia.  This new entity with some or all new investors could pursue the new sales area and those investors would share in the rewards gained from ice-cream sales in West Virginia.

A note of caution B if the same entity name and style of marketing ice cream is used, there could be franchising or intellectual property issues.  See our March/April and May/June 2004 newsletters, “Franchising: Is It For You?” Parts I and II.

There are undoubtedly many other reasons, such as estate planning, to form new entities.  There are also different ways to approach setting up new entities in this context that can have strikingly different tax consequences. As always, proper planning is essential.

Since this is a newsletter, we cannot explore all of the considerations in this limited space.  If you own a business that needs to establish, or discuss setting up, a separate corporation or limited liability company, you may want to contact Newland & Associates.

Copyright 2004

Published by the law firm of Newland & Associates, PLC
9835 Business Way
Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business law and tax-related services.

While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.

Redistribution or other commercial use of the material contained in Newland's Business Notes is expressly prohibited without the written permission of Newland & Associates, PLC.

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