Although business owners generally form a legal entity with a clear idea in mind of what that business will entail, once launched, the initial idea tends to evolve as the business does. The reality of this evolutionary process highlights the importance of undertaking an annual organizational assessment to ensure that the scope of the entity and its structure remains appropriately suited to the business operations and the risks it presents. Sometimes, a business experiences enough growth that it becomes prudent to carve out certain services from the core entity and form a single purpose entity through which those services can be delivered. A primary benefit of a single purpose entity is that it can serve to isolate liabilities so that parent companies and affiliates (barring certain actions on the part of the shareholders/members) are generally protected from the activities or services performed within it.
A client recently came to us to address a potential asset sale. During an assessment of the business, it became clear that her company had grown exponentially since inception, and now housed four different lines of business. One was engaged in federal contracting, and another focused on development of patented intellectual property used in the private sector. In this instance, she was both increasing her risks and potential liability by housing all four lines of business under one entity, but also was inadvertently and unnecessarily binding three of the lines of business to certain rigorous standards as a result of the federal contracting component of the one. We counseled her about setting up separate single purpose entities through which she could operate each of her lines of business, which would limit her risk and allow for more streamlined contracting.
The New Year provides a great marker for conducting an annual review of your business. Remember that in addition to reflecting on the financial picture, consider the story the financial picture tells in terms of whether the direction of the business requires review of its foundation. Financial and structural risk assessment is an ongoing process if liabilities are to be effectively managed and opportunities gained.