When Two Business Entities Are Better Than One

Most business owners know that they need to form either a corporation or LLC to protect themselves from the risks associated with running businesses in our modern world. Alas, most don’t think through the process to its logical end when evaluating these risks. As a result, they often don’t realize that they may need two, not one, business entities.

Let’s start with a simple question. Why do you form a business entity? Yes, there can be tax reasons, but most form them to protect themselves from the risks associated with being in business. These risks include being sued for a ton of money or having creditors come after the company to collect debts. Business entities are great at creating a shield between you, the owner, and these debts. The question is whether that is enough. For many businesses, it is not.

So, what is the problem? The problem is most of your valuable and critical assets are actually owned by the corporation. This means they are exposed to the risks of running the business. Consider an example. I own a hosting company for websites. I incorporate it and business goes really well. Everyone knows “Chapo’s Hosting”. I have a trademark, logo and the whole nine yards. My servers get hacked in the first week of December and all the sites of my clients are down for the first 10 days of the month, the busiest on the web. I get sued for millions. While I am not going to be personally liable, I am going to lose all my servers, equipment, trademark and logo to the companies suing me. Once I lose all of those, it is just a matter of time till I can’t meet my personal bills and lose my home, car and so on. We are talking about a nightmare!

Many businesses use a double entity strategy to avoid this. They form one entity to deal with the public and a second one to hold all the valuable assets of the company. This second entity then leases the assets to the first entity. If the assets are put at risk, the leasing entity simply takes them back. The downside of this approach is your costs are all doubled since you have two entities, but the upside is you more or less eliminate the risk of losing everything.

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