How do I protect my company from liability while still participating in risky new ventures?

Instead of entering into a new line of potentially risky business from your current and successful business, consider creating a parent companies and subsidiary companies.  A parent company owns all or most of the shares of the subsidiary organization.   The purpose behind this type of organization is straightforward: the parent company, like any other shareholder is not liable for the debts of the subsidiary.  In this fashion, the parent company can undertake new ventures without putting at risk its own assets beyond those that it commits to the new organization.

 

Lets say Jane and John have grand plans to expand their already successful doughnut business, Soba Doughnuts.  They want to open up another business that is more of a full-fledged bakery, doing pastries, cakes, and an assortment of other delicious items.  Because their doughnut business has done so well already, they want to use the brand recognition of the name of the doughnut shop, Soba Doughnuts, to let their customers know of the quality of the bakery, Soba Bakery, but still want to insulate each business from the liabilities of the other.  There is strong competition for bakeries in the city they live in, and just because they have a good doughnut business going does not guarantee that they will be successful with the bakery.

 

The best path forward would be for Jane and John to create a parent corporation, Soba, LLC, and transfer ownership of the bakery over to the new parent corporation.  Then, John and Jane can use the profits that they make from Soba Doughnuts, to invest in their new Soba Bakery venture.  The profits of the subsidiary company, will be passed to the parent company, Soba, LLC, and the parent company will be the one to start and fund the new bakery, in exchange for ownership interest, or shares, in the new Bakery.

 

This would insulate each business from the liabilities of the other.  The bakery would not be liable for the slip and fall of someone at the doughnut shop, and the doughnut shop would not be liable for allegations of food poisoning from a bad cake that they sell.  The parent company could further license the subsidiary companies the use of its name and brand recognition without having to expose each subsidiary to the full liability of the other.

 

Consult with your local counsel to ensure that the transfers of ownership, and use of subsidiaries are in compliance with your local statutes and regulations.

 

Photo By: Moyan Brenn