Last week I wrote about business asset protection through the use of a holding company (here: LINK). In addition to the purely legal aspects of asset protection, a business owner should consider the cost/benefit to using this structure before implementing such a strategy. It might not be worth it in every situation.
What are the costs of an asset holding company?
· Legal costs to set up a simple holding company (attorney fees, state filing fees)
· Legal/admin costs to administer a separate company (drafting lease/license agreements)
· Administrative costs such as separate phone, email, letterhead which I always recommend
· Accounting costs of a separate business, including tax preparation, payroll (if any)
· Contract administration costs, e.g., preparing and administering a lease or license of the asset
· Cost of defending the holding company against claims made against it
· Transfer costs of the assets (if necessary) such as licenses, title
These costs need to be weighed against the potential for a catastrophic liability hit that would result in a loss of the asset, as well as the ability to shift liability to the operating-entity. For example:
· Likelihood of a catastrophic loss (i.e., do you really need to lose sleep over it?)
· Cost of insurance to cover anticipated losses, and whether or not insurance is available
· Potential for uninsured loss (e.g. breach of contract suits) and the size of the potential loss
· Ability to shift liability from the asset-entity to the operating-entity (e.g., “additional insured” rider on insurance; shifting maintenance obligations on equipment to the operating entity).
· Ability of the operating-entity to satisfy / survive a loss and continue operating
· Asset depreciation over time (loss of asset value)
· And ultimately, the value of the potential loss.
In the example from the previous article, the business owner had 15 charter buses that he leased to an operating company. Obviously the buses had tremendous value, probably in excess of $1-2 million. Same for the owner of an office building, someone who owns a crane or other heavy equipment, or even a manufacturer with land and expensive equipment. These businesses could benefit from this multi-structure approach to asset protection.
On the other end of the spectrum would be a business such as a small bakery that maybe owns a delivery van, a few ovens and some kitchen equipment. The assets, while perhaps valuable to the owner, aren’t worth the cost and effort of putting them into a separate holding company. The van can be insured for liability; a breach of contract suit can limit damages through contractual provisions; and premises liability insurance would cover any claimed on-site injuries.
One final consideration is goodwill with investors. For a growing business, an investor will want to be assured that there is some residual value to the company if it needs to be liquidated, and in the case of a lender, they will want real assets as collateral for a loan. Putting valuable assets into a separate holding company signals to investors that you may not have faith in your business; or that you’re not willing to risk the loss of your own money while at the same time asking the investors to risk losing theirs. They may be okay with that, but it’s something that needs to be considered.
When deciding whether or not to put assets into a holding company, one should consult with ones lawyer, accountant, and partners to do a cost/benefit to this structure. If you’re in the Asheville or Chicago area, call me for business law help at (312) 671-6453 or go to palermolaw.com for more information.