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  1. #1

    Default How to Insulate a New Business from a Parent Company

    My question involves business law in the state of: KS

    I have found that some seem to feel insulating a new company from a parent company is somehow shady, though it seems pretty common and just seem practical to do so. I am curious what elements may need considered for insulation or protection for a parent company and its assets from any liabilities in a new company? Around here, it seems some seem to setup as a separate entity and lease, rent, or even purchase products from the parent company.

    I am familiar with at least one where there are actually 3 separate businesses under the same roof. The parent company owns the real estate. I am just not sure how they work the details in that.


    The new business is not necessarily a high liability, but today everyone is looking for a handout and frivolous lawsuits are the standard. Even in a worst case, we simply cannot allow a new venture to hurt the parent company, even if that means not doing it at all.

    Some have said even if I setup of a completely different company, different location, different everything, my other businesses could be at risk. That seems ridiculous to me...

  2. #2
    Join Date
    Oct 2014
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    Default Re: Insulating New Business from Parent Company

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    ...and frivolous lawsuits are the standard.
    That is certainly not true (though I've met business people who are convinced that it is). Truly frivolous cases, while they do occur, are not common. In most jurisdictions the filing of a frivolous lawsuit subjects the plaintiff to the possibility of sanctions. Of course cases vary in how strong they are, either factually or on the law. But most people do not bring really weak cases because they'll likely lose and it costs money to litigate. No structure will prevent every lawsuit, and adequate insurance is always a good idea.

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    Some have said even if I setup of a completely different company, different location, different everything, my other businesses could be at risk. That seems ridiculous to me...
    A lot of nonlawyers have incorrect notions of how the law works. But it is true that two companies that are separate but have common ownership could run into problems where a person with a claim against one of the may successfully go after the assets of the other one, too. A lot depends on how the companies are organized and whether the owner is careful to ensure they are indeed kept distinctly separate.

    There is no single structure that is right for every business enterprise. Instead, what works best will depend greatly on the details of the business, the goals that the owners/management have for the business, and the laws of the jurisdiction(s) in which the business will operate. It's a really good idea for a business person to consult both a business/corporate law attorney and a tax attorney for advice in setting up the structure for a business venture. Getting it right from the start will avoid a lot of problems later.

  3. #3
    Join Date
    Jul 2018
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    Default Re: Insulating New Business from Parent Company

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    I have found that some seem to feel insulating a new company from a parent company is somehow shady, though it seems pretty common and just seem practical to do so.
    I suppose that depends on what exactly you mean by "insulating [the subsidiary] from [the] parent company."


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    I am curious what elements may need considered for insulation or protection for a parent company and its assets from any liabilities in a new company?
    If you're talking about insuring that the subsidiary cannot be held liable as an alter ego of the parent (and vice versa), the answer is that they need to be maintained as separate legal entities.

    Not sure what the purpose is of the last three paragraphs of your post, but if you are an officer of a company that is a parent or subsidiary of another company and are concerned about ensuring that no alter ego liability is reasonably possible, then you should be consulting with a local business attorney to review the companies' operations and advise you.

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