Protecting Related Entities and Subsidiaries from the Debts of One Another

lockOnce a business owner or group of owners properly create a series of related legal entities or subsidiaries of a parent corporation in order to conduct separate businesses, how can they protect the related entities and subsidiaries from liability for the debts, breaches of contract, and torts of one another? Business formalities must be observed, and the business and affairs of each business entity must be kept separate.

Most importantly, each contract should be in writing, should clearly identify the parties to the contract, and should be signed in the name of the entity responsible for that contract. The full and correct legal name of the entity responsible for that contract should be used in the contract and in communications related to that contract. The contract should be signed by a representative of the entity responsible for the contract, and the person’s title with that entity should be identified.

If trade names are used, do so with great care. In Georgia, trade names should be properly registered with the Clerk of the Superior Court of the county in which each business is principally located. Contracts and written communications, such as letters, emails, and invoices, should identify the full and correct legal name of the entity followed by d/b/a (doing business as) and the trade name. Two or more entities should not use the same trade name.

The annual registration of each business entity should be properly maintained with the Georgia Secretary of State and all fees should be paid on time so that the entities are not administratively dissolved by the Secretary of State. Contracting in the name of a non-existent entity may subject related entities, owners, and agents to liability for the debts of the non-existent entity.

Each business entity should have its own bank account(s). The money and other assets of one entity should not be commingled with the money and other assets of another entity. The debts of one entity should not be paid from the account of another entity. Funds paid to one entity should be deposited into the correct account of that entity.

Although the foregoing tips help protect related entities and subsidiaries of a parent corporation from the debts of one another, Georgia courts assess a variety of specific facts in each case to determine whether to “pierce the corporate veil” (i.e., disregard the corporate entity) and subject one entity to liability for the debts, breaches of contract, and torts of another entity. Consequently, a business owner who is concerned that related entities may be subject to liability for the debts of one entity should consult with an experienced business litigation attorney for advice on how to best handle the situation.

The experienced attorneys of Schklar & Heim, LLC represent individuals and companies in litigation pertaining to the creation and operation of legal business entities. We have been involved in some of the most complex business litigation in Atlanta, and we represent clients across the state of Georgia. We offer flexible fee agreements and an unmatched level of client service. Call our office today at (404) 888-0100 to discuss your matter confidentially.