Creating Related Businesses: How Robbing Peter to Pay Paul Could Wipe Out Peter!
Often time companies will have the need to create related businesses to their core business. While in theory this is great, in practice it can be more than problematic. For instance, you are the key shareholder in a product company. You see great opportunities that relate to your product company by setting up a transportation company that can ship your products and possibly others’ products within the industry. You also see the opportunity to establish an insurance company that insures your products and again, possibly those of others’ in the industry.
Excited about the potential revenue that you can capture, you have these two additional entities created. You also take money from your product company and place it in two new bank accounts for these two new companies that you now own. As time goes on, these new companies need additional capital in order to sustain themselves and reach your goals. You have bills for each of the new companies paid out of the product company. You also have employees working on all three companies, but only have their payroll taken from the product company. In addition, you mix and commingle money, assets, and human capital between all three of your business entities—because, after all—they are all your companies.
Is there a big deal? Yes! Why? Because by failing to maintain and operate all three entities separately, you have now risked liability from each of these companies as to the other. For example, if the transportation company gets sued and is subject to damages as a result, the lack of keeping all the “eggs” of each company in their own “basket” now permits the plaintiff to reach assets of the other companies. If the product company has cash flow and/or sizable assets, your operating the three companies interchangeably has now put your product company at risk.
Therefore, it’s important to ensure that each company operates as if it has three different owners, notwithstanding that you are the only owner. One example of operating under complete separateness is the following: If one company needs cash, make it a loan, document it as between the two companies, and ensure that the company who needs the money pays its bills from its bank account with that loan money.
Operating completely separately may take some getting used to; however, it beats having to risk everything you worked for to build up that product company. Making sure you have the right systems in place in the short run, will position you to try to reach your goals in the long run.