One of the most frequent questions we get is whether to operate an organization through a single entity or multiple entities. There are quite a few overlapping and interlocking issues to consider. Big rocks include risk silos, insurance, organizational structure, and organizational/administrative capacity. These aren't binary checkboxes but levers that can dial up or down.
There is no one-size-fits-all answer to this question and there are significant pros and cons to each approach. Executives should analyze advantages and disadvantages of each, evaluate risk tolerance, and balance strengths and weaknesses of each position. Some general principles can guide you, however, in making the decision that's best for your organization. We've included some thoughts below based on our experience advising hundreds of clients through this analysis over the years.
Administrative Burden
One of the main advantages of operating your organization as a single entity is simplicity. A single entity allows you to maintain one set of books and records, one tax return, one EIN number, one payroll, etc. Conversely, with multiple entities, the administrative burden on your finance, HR and operations professionals can be quite high (think shared-services agreements, making sure expenses and AR is classified to the right entity, different P&Ls/financial statements for each business unit, consolidated financial reporting, intercompany transfers, etc.). On the flip side, separate entities can offer more precise decision making - financing opportunities for different business lines, or cost savings with different employee benefit packages (provided you navigate the controlled group rules), while a single entity is more of a blunt instrument.
Organizational Control
There can be tight organizational control with only one governing body (e.g., Board of Directors) for a singular entity as opposed to multiples sets of corporate governance structures and bodies to deal with in a multiple entity scenario. We've often seen “mission drift” with our non-profit clients particularly when there are multiple entities and multiples Boards for each specific entity (think a church and a related school). If, however, there are good reasons for multiple entities (such as creating risk silos around important assets) there are ways to combat organizational control issues, such as giving one entity the right to appoint the other's board seats.
Professional Services
Professional services provider fees - lawyers, accountants, etc. tend to be lower with a 1 entity approach, whereas fees can be higher with multiple entities.
Liability
One of the main disadvantages of a single entity (there is always a price to pay for simplicity!) is that all the assets are in one organization, and all assets are at risk from any particular liability claim. Envision a 7-figure HR/employment or cyber/data-breach type claim (yikes!). It would certainly be nice if a plaintiff or regulator had to pierce through corporate entities to attack assets outside of only a certain division, line, or location. A separate entity for each business function provides a sort of firewall between the different businesses so that if one entity is sued, the others generally continue largely unaffected. This strategy is particularly advantageous if you operate several businesses with different risk profiles (a restaurant and a dynamite company), if you have various locations (one entity per geographic location, especially in different states or regulated industries), and/or if particular business lines are very profitable and contain substantial assets, and others are not as profitable and/or do not hold valuable assets.
Taxes, State Regulation
Operating in multiple states (with different tax structures and regulatory environments) is also an important concern and often is a reason to consider multiple entities.
Three other things to consider. First, even if you go down the complicated org chart/structure route, if you don't truly keep everything separate, a good plaintiff lawyer is going to make a “piercing the corporate veil” argument – claiming that even though there are multiple entities, the entities are really part of 1 group and therefore assets of all of the entities should be at risk. Companies can guard against this by “respecting the corporate formalities” – truly keeping everything separate – no commingling of funds, minimizing board overlap, keeping separate books and records, etc.
Second, insurance is an excellent tool to overlay with your legal approach. Many of our clients choose a single entity for ease of administration, but then also “over-insure” on various risk buckets because all the assets of the organization are in a singular entity. Whereas if they had invested in the complicated/risk silo legal approach, perhaps they can spend less on insurance based on the limitation of assets available to plaintiffs.
Lastly, operational excellence is another factor to consider. Excellence (or conversely weakness) of your operational team – i.e., policies, procedures training, accountability, etc. can impact this analysis greatly. If a team is operationally strong, then perhaps a singular entity/insurance approach is more appropriate. If a team is operationally weaker, legal risks are higher, and perhaps a multiple entity approach is more appropriate to guard against the lawsuits that are sure to come.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.