![]() ![]() ![]() While some overlap among related entities is acceptable and obviously efficient, maintaining the distinction among them as truly separate entities is critical to protecting the assets and interests held by the entities. The lesson for a small business owner is similar to the lesson learned from understanding the “alter ego/veil piercing” theory (see my previous blog post: “ Why an LLC won’t protect your personal assets (and how to actually protect those assets)”). Simply operating the entities as one economic unit could be sufficient for the courts to impose liability on all the entities. Transactions among the entities were not properly reflected in the accounting records.Īll of the entities in Green were liable for the debts and obligations because the court found that the entities “were not operated as separate entities,” but rather “functioned as a single economic entity despite the internal compartmentalization of ownership and operation by means of separate incorporation.” An important point to note about the factors from Green is that fraud is not identified as a requirement. Centralized offices for the entities and,ġ4. Corporate formalities were not observed ġ3. Some employees were compensated by more than one member of the group ġ2. Almost all of the business of the entities was given to them by the other entities ġ0. Some employees received salaries from more than one entity ĩ. There were common employees and at least one entity had no employees Ĩ. The income of the companies was largely dependent on collecting receivables from the other entities ħ. The entities were financed primarily through intercompany debt Ħ. There was “a tremendous amount of intercompany debt due to the lack of adequate initial capitalization” ĥ. The corporations entered into some transactions without economic justification and solely for the benefit of another related entity Ĥ. Two of the shareholders “dominated the affairs of all of the corporations” ģ. The same family members were the controlling shareholders of all of the corporations Ģ. The facts the court found important were:ġ. The court in Green ruled that several related insurance companies could be held liable for the debts and obligations of the others because the entities were operated as a single business enterprise. excessive fragmentation of a single enterprise into separate entities. unclear allocation of profits and losses between entities andġ8. undocumented transfers of funds between entities ġ7. services rendered by the employees of one entity on behalf of another entity ġ6. noncompliance with corporate formalities ġ3. one entity using the property of another entity as its own ġ1. receiving no business other than that given to it by its affiliated entities ġ0. ![]() one entity paying the salaries and other expenses or losses of another entity ĩ. one entity causing the incorporation or organization of another affiliated entity Ĩ. ![]() directors and officers of one entity act independently in the interest of that entity ħ. unified administrative control of entities with similar business functions Ĥ. companies with substantial identity of ownership or ownership sufficient to give actual working control Ģ. Champion Insurance Company, the court outlined a set of factors to be considered when determining whether several related entities constitute a single business enterprise:ġ. In those cases, the courts have imposed liability on the related entity and rejected the argument that the related entity is free from liability because it is a separately organized or incorporated entity. The SBE theory of liability has been applied in situations where one entity “is so organized and controlled as to make it merely an instrumentality or adjunct” of another entity. The SBE theory allows the court to disregard the corporate structure and treat all the entities as one, resulting in all entities being liable for a judgment against single entity. The primary purpose of that structure is to protect the assets of the other businesses in the event one of the businesses has financial difficulties or faces legal liability. In most cases where an investor owns multiple businesses, the various business interests will be separated into different LLCs or other entities. Another important issue that small business owners should be aware of is the “single business enterprise” (SBE) theory. ![]()
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