Dr. Adrienne B. Haynes, Esq.,
Contributor

Creating an umbrella company to manage new or existing businesses is a type of business combination. When deciding to undertake this transaction, there are several factors to consider. Prudent business owners should thoroughly consider the implications of creating a parent or holding company, including a liability and choice of entity analysis, as well as how to manage the transfer of ownership for already existing businesses.

Creating a Parent Company
The decision to streamline all businesses under an umbrella company may be done through the creation of a parent company or a holding company.

Holding Company
A holding company is a company formed to control other companies, usually confining its role to owning stock and supervising management. It does not participate in making day-to-day business decisions in those companies.

Parent Company
A parent company is a corporation that has a controlling interest in another corporation (called a subsidiary corporation), usually through ownership of more than one-half of the voting stock.
Legally, the two entities are very similar. Both may take the form of a Limited Liability Company (“LLC”) or a Corporation. They must be registered with the State’s Secretary of State Office and if the business is formed as a corporation, it must observe corporate formalities.

Liability Analysis of a Holding or Parent Company
The purpose of creating entities is to shift the risk of being sued to the entity and away from our person, and thus, our personal assets. The creation of a holding or parent company provides another layer of liability protection to the owners. With the proper legal structures in place, if subsidiary company fails or is sued, it does not affect the entire business empire. If a subsidiary company were to be sued, usually only the assets and operations of that business are considered in the litigation. However, this liability protection does not exist if the parent or holding company is sued.

Corporate Veil
The legal assumption that the acts of a corporation are not the actions of its shareholders, so that the shareholders are exempt from liability for the corporation’s actions.

Piercing the Corporate Veil
The judicial act of imposing personal liability on otherwise immune corporate officers, directors, or shareholder’s for the [business’] wrongful acts.
However, courts have pierced the corporate veil of limited liability if certain factors are present. In order for a court to pierce the corporate veil when a subsidiary is sued, which would expose the parent company to liability, one or more of the following factors must exist to indicate injustices and inequitable consequences:

  • Fraudulent representation by business directors
  • Undercapitalization
  • Failure to observe corporate formalities
  • Absence of corporate records
  • Payment by the corporation of individual obligations; or
  • Use of the corporation to promote fraud, injustice, or illegalities
    Specifically in Missouri, the courts have applied a three part test, as held in Radaszewski v. Telecom Corp. To pierce the corporate veil, one must show:
  • Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction has at the time, no separate mind, will, or existence of it’s own; and
  • Such control must have been used by the defendant company to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal rights; and the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

Business strategies for avoiding piercing of the corporate veil include:

  • Having a diversified portfolio of businesses owned by the parent company,
  • Ensuring that the business has insurance (a consideration in the undercapitalization analysis), and
  • Making sure that the parent company treats the subsidiaries are separate businesses (subsidiary does business in its own name, no undocumented transfers of funds, consider separate business insurance, subsidiary has its own assets)
  • Ensuring that owner’s treat the business entity as separate than themselves.
    When a parent company is sued, the subsidiary companies are at risk because when they are owned and controlled by the parent company, they are assets, and thus, liable to be used to satisfy a judgment or debts. In Missouri, courts have generally held that while a creditor may be allowed a court order to the profits of a subsidiary, they cannot take possession of the ownership interest or affect the management of the company. Activities outside of general management and supervision of the subsidiary companies should be limited as to not open up the parent or holding company to suit.

This article is an overview of business formation legal considerations, and does not cover every legal right or obligation, consideration, exception, or restriction. These decisions are complex and should be well researched and discussed with professionals before being made.

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This article was originally published on The SEED Law Column at https://medium.com/seed-law-column.

Dr. Adrienne B. Haynes, Esq. is an award-winning attorney and business woman who specializes in helping entrepreneurs develop sustainable infrastructure and business practices. She is the managing partner of SEED Law, a boutique business law firm, and owner of SEED Collective, a consultancy. For more information, please visit www.adriennebhaynes.com.

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Thanks for reading! My name is Dr. Adrienne B. Haynes and I’m an entrepreneur and attorney based here in Kansas City. My law firm, SEED Law, has been partnering with business owners across the Northeast and the city for over 10 years. I loved living in the Northeast and I was fortunate to serve as an Entrepreneur in Residence for the Kauffman Foundation in 2017. Together with a dedicated group of Northeast residents and leaders, we explored a community designed innovation district pilot program. I was able to present this work during a TEDxUMKC Talk on Community Innovation Design in 2020.
Over the next few weeks, I’ll be contributing articles and resources on small business and estate planning legal considerations. If you have any questions, please reach out to me directly at
adrienne@seed.legal.