Have you ever wondered why some companies that have multiple lines of business have multiple legal entities to operate them?
Why does one company have a holding company that owns 14 different Oklahoma limited limited liability companies?
The answer may be important to your Oklahoma company as you expand and grow.
The General Philosophy
My general philosophy on adding new business is if it is a business that is distinct from the existing business and/or presents new types of liability, the new line of business should be operated under a new legal entity.
Primary Purpose
The primary purpose of this legal separation is to attempt to keep the legal liabilities created by each business separate from the other business. For example, if a separate line of business such as roofing is sued due to an employee accident, if the new business is legally separate from the existing business, it much harder for the plaintiff in the lawsuit to involve the existing business in any way.
This is an advancement of the concept of using a legal entity (Oklahoma corporation or Oklahoma LLC) to separate your business from your yourself. A sole proprietor typically incorporates so that the business is operated legally separate from themselves. That is, the legal entity creates a wall of separation between the business activity and the owner’s individual assets. A claim against the business should not normally lead to the liability of the owner.
Key consideration
One thing to consider is whether you new business is simply a additional “line of business” or whether it is a new business with its primary tie to the existing business being common ownership.
A new line of business or new business unit may not require a new legal entity. While a new business very often requires the creation of a new legal entity.
Example from your friend in the the digital age
Cox Enterprises is an example of this type of legal separation for distinct business. Cox Entrprises is diversified media conglamorate that owns newspapers, dealertrack technologies, television stations, radio stations, Cox Communications, Manheim Auctions, Autotrader, Kelley Blue Book,Savings.com and Valpak. Many of the seperate lines of business are owned by separate entities including Cox Media Group, Inc., Cox Advanced Services Oklahoma, L.L.C. and Cox Cable Authorized Retailer, Inc.
A practical example
A business owner could create a
new entity for the new business and still use the existing business for branding purposes. You could do this through a basic licensing agreement between your existing entity and the new entity and a shared services agreement. Additionally, you set up a holding company as the entity on top and then operate each business under entities owned by the holding company. You would create two new entities to carry out this plan and then set up one as Entity 1, in which you would own 100%, and then Entity 2 and Entity 3, which would each be owned 100% by Entity 1.
Questions to ask yourself
A couple of questions to ask yourself to determine whether you need a new legal entity:
- How will new business be connected to the existing business?
- Will new business use the same name as the existing business?
- What other ties will the new business have to the existing business?
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