15 December 2020

Increase asset protection while mitigating risk

On the top of every business owner´s mind is the question how to protect their assets all the while mitigating any risks. That’s a good and loaded question, but with the right strategy in structuring your business into different entities, both concerns can be easily addressed. Many businesses, including the big Fortune 500 companies and small businesses, have structured their business into different divisions called subsidiaries who are then held by a parent company.

A parent company is a holding company which can be in the form of a trust, foundation or even a corporation. They holds assets which can include real estate, intellectual property as well as membership interest in other companies. The subsidiaries, or otherwise known as operating companies, can be incorporated to manage the company, run the day-to-day operations and provide services and/or products of the parent company.

Opening a corporation or company typically offers limited liability where the shareholders’ personal assets are protected. Through structuring a business into separate entities the holding or parent company will not be held liable for acts of the subsidiary companies. This will add a level of protection to the holding company’s assets in the case lawsuit or bad debts.

For instance, company A holds all the company’s assets within the consolidated organization. Company B can then lease the assets from Company A to provide their products and/or services. In the case of a lawsuit for Company B, Company A cannot be held liable and thus the corporate assets will be protected.

Although company A & B are part of the larger consolidated organization, they operate as 2 separate entities.

Now, that does not mean that cash and assets can be transferred freely between the 2 entities. In the case of a lawsuit that can be construed as an intent to deceive and avoid any liability, and in this case Company A could be held liable.

Jurisdictions for parent companies and subsidiaries

To increase levels of privacy and asset protection, parent companies and the subsidiaries can be incorporated into different jurisdictions. The Cayman Islands, Panama, Nevis and St. Vincent are great jurisdictions to hold the parent company. These types of companies can benefit from tax-friendly policies, privacy laws and each jurisdiction offers a legal structure to protect the entity’s assets. The subsidiary or the operating company can then be held in the same jurisdiction or in a different jurisdiction that better suits the entity’s business activities.

It is always advisable to contact a legal expert to determine your business needs and goals and better advise on how best to structure your business to reap the most benefits.

Written by Michelle Hammond

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