All Eggs in One Basket
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
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
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.
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.
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
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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