If you are a successful business owner, congratulations. You may be thinking of setting up a subsidiary corporation to your parent corporation in order to branch out. As you may recall, one of the biggest advantages of a corporation is limited liability. However, limited liability in a corporation is not absolute. There are times when a court will “pierce the corporate veil” and permit personal liability to attach. One such situation is when a subsidiary is mismanaged, exposing its parent corporation’s liability. There are steps you can take to avoid this situation from occurring when setting up a subsidiary corporation.
Adequate capitalization. Always ensure there is proper funding for the subsidiary corporation. Generally, a court will weigh adequate capitalization heavily in determining if the subsidiary is a sham to protect the parent corporation, or is indeed its own separate entity.
Maintain adequate corporate records. Always ensure that both the subsidiary and parent corporations have their own adequate corporate records. A lack of proper records may signal the court that the subsidiary is a sham to protect the parent corporation.
Comply with corporate formalities. A subsidiary corporation is to be treated separately from the parent corporation. In order for this to occur, the subsidiary must comply with corporate formalities as set forth by the state on its own. Avoid losing limited liability because of a lack of compliance with corporate formalities.
Do not commingle with the parent corporation. A subsidiary corporation must maintain its own separate existence from the parent to maintain limited liability. This includes ensuring its own funding that is not shared with a parent corporation.
Do not allow the parent corporation to take advantage of the subsidiary corporation. Again, the subsidiary corporation must remain separate from the parent corporation. This must be accomplished through its own separate officers, board of directors, independent decisionmaking, etc. Ensure that the subsidiary corporation retains its independence of the parent corporation.
Setting up a subsidiary corporation could be in your best interest. However, it must be done with caution and adherence to certain rules to ensure that it retains independent from the parent corporation. If you do not follow these specific guidelines, you may be exposing your parent corporation to liability through the subsidiary corporation. A good legal team can help ensure the transition in setting up a subsidiary corporation goes smoothly. Call the Trembly Law Firm at (305) 431-5678 today to schedule a consultation.