Q&A - How many companies do you need?

Question:

 

Hi Ken,

I was wondering what your opinion would be if my existing security company

would open a separate company for our recently acquired Brinks alarm

dealership. I wanted to keep the two companies separate to isolate and/or

to protect against one company affecting the other in case of a suit.

Currently, my company is setup as an “S” Corporation. Someone told me I

should dissolve the corporation and setup an LLC for my existing company,

then the new Brinks division should be a subsidiary the LLC. You see Ken, I

want the flexibility to operate both companies side by side in one office,

but legally keep them separate if possible.

I also need sub-contractors agreements for my sales people and installers

for the Brinks account. They will have their own tools, keep their own

schedules and drive their own cars.

That will do it for now.

Sincerely,

Tom K

 

 

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Answer:

First let me direct you to an article on my web site that clearly

recommends an S corp rather than an LLC. It's just easier. You only need

the LLC if you are planning to distribute profits, or losses, in different

proportions than your shareholders hold. If you intend to treat the

shareholders according to their percentage interest the S corp is all you

need. While you may save on state annual fees with the LLC, the S Corp is

still the recommended entity.

 

So the next question is, how many do you need?

If you don't intend to really separate the one or more entities that you

form then you are kidding yourself if you think you can avoid exposing

liability among them. Courts will pierce the corporate [or LLC] veil if

entities are merely the alter ego of others.

In order to operate separate entities you need to observe some rather

strict business ethics or practices, such as maintaining the separate

entity in good standing, paying taxes, separate employees and payroll,

separate bank account, separate telephone lines, offices letterheads, web

sites, officers, directors and shareholders, and separate operations and

areas of work.

To the extent that you don't follow the above, you risk piercing the

corporate veil. The more of the above you ignore, the greater the risk of

exposure.

Having said that, you can definitely operate more than one business and

entity. Alarm companies often separate their installing and servicing

company from their central station monitoring company.

If you have a security business that has recurring revenue, such as lease,

monitoring, service, CCTV video monitoring and Fire Inspection, you may

want to separate that operation from the installing company which may not

have recurring revenue, such as access control or CCTV with local DVR.

You may want to separate entities that operate in different states or

cities.

You may even want to separate your alarm companies depending upon what

central station you use for monitoring.

It would be wise to separate your security company from other non security

work that you may do, such audio video installations. I would also separate

stationary guard businesses from the alarm company.

Liability is probably not the most pressing reason to separate your

operations. You should be carrying proper insurance to cover unanticipated

exposure, and of course proper contracts to properly insulate you from

liability.

A more practical reason to separate the operations into separate companies

is more likely the prospect of selling parts of the business; it will be

much easier to sell of the recurring revenue contracts if that part of the

business is separated.

 

I would suggest that separate corporate entities are not the norm, and are

not typically necessary. Before going to that expense consult with your

accountant and corporate counsel. Don't be satisfied with their response

that it would be OK or fine to separate the operations, but find out if

they really think it necessary and worth the effort.