Many business owners and consultants have all their corporate assets in one company. But what happens when that company is sued for some unforeseen reason? All the assets in that company are now at risk. Is this risk worth taking, or is there something you or your clients can do about it?

I recently worked for a company that had five operating businesses in one corporation, which made the performance reporting of each business difficult to understand and gauge. Also, if one of these business units got into any type of financial difficulty, it could collapse the entire corporation and all the other businesses inside it. In this particular case, the construction arm of the business got into trouble the previous year and wiped out all the equity on the Balance Sheet.

All owners of private companies should incorporate a Holding Company (Holdco) that would own the consulting company or operating business. The Holdco should own on its Balance Sheet all the operating (i.e., manufacturing equipment) assets, any intellectual property, and any surplus funds not required to operate the business.

This means that the operating company or consulting company (Opco) would not have any significate assets, technology or surplus cash on its books. The only things it would have are employees, inventory, AR and AP. The rest should be leased with a contract and payment terms from the Holdco.

Here is another thing to consider. If Opco required funding, the monies should be lent from Holdco to Opco with a security agreement, interest rate and repayment terms. This may not allow you to be ranked ahead of the banks, but it would clearly have you ranked ahead of all the unsecured creditors.

In another company I worked on, the building and land were owned by Holdco, but the technology and machinery resided in the operating entity. So, if Opco got into trouble, we ran the risk of losing our intellectual technology, which was used to produce most of the items that we sold. When we raised protection of the IT with the external accountants, the accountants had not considered this matter since it was old and not recognized on any Financial Statements. Thus, if we had lost the IT we would have been out of business.

This whole area of risk mitigation can get fairly complicated and may require lawyers and tax specialists, depending on the size of the business. But taking these steps is worthwhile, especially since we are becoming more like the United States — very litigious and suing everyone in sight.

If you have any questions about risk mitigation, please feel free to contact me – Florian Meyer at (416) 873-8684 or fmeyer@newhousepartners.com. Keep smiling and stay safe.