New CT Expert Insights Podcast discusses how to maintain critical asset and liability protections
The economic uncertainty wrought by the COVID-19 pandemic has made it more daunting than ever for companies to risk venturing into new business segments. But by structuring itself as a holding company a business entity can help protect itself and its assets from the financial aftermath of a failed venture or legal action. If those same assets are not carefully arranged throughout the larger enterprise, however, the protection a business enjoys can quickly disappear. That’s according to a new episode of Wolters Kluwer CT Corporation’s recently launched CT Expert Insights Podcast.
Sandra Feldman, Publications Attorney at CT Corporation, explains that the popularity of the holding/operating company structure is largely owed to the degrees of separation it provides. So long as a holding company keeps its subsidiaries’ assets isolated from both itself and one another, the fallout of a potential business downturn or legal action remains limited. Feldman uses the hypothetical example of a holding organization that owns two operating companies during the podcast – one a successful manufacturer of widgets and the other a restaurant that is struggling financially due to the pandemic.
“Let’s say the restaurant had to close for a while because of COVID-19 and it ran up debts it’s having trouble paying. The restaurant’s creditors can only look to the assets of the operating company that owns the restaurant to satisfy the debt,” Feldman notes.
With that protection firmly in place, holding companies can invest in new startups or markets without incurring risk to their core businesses. Still, the more operating companies that a holding company owns, the more complex its corporate structure and regulatory obligations will become. For instance, holding and operating companies are subject not only to initial formation fees, but annual compliance costs as well.
Feldman noted that many large holding companies invest in an entity management system to help govern the enterprise. She also urged businesses considering a holding/operating company structure to consult with legal experts who can assist them in weighing their unique set of pros and cons.
“And if they decide to go ahead, CT Corporation is a trusted partner that can help form the holding company and operating companies and also assist with various post formation and compliance needs,” Feldman adds.