Using Multiple Corporations

If the business of the corporation can be divided into separate businesses, assets can be protected through the use of multiple corporations. For example, a single corporation may own and operate six medical clinics in different locations. If something happens at one of the clinics, giving rise to potential liability, the assets of the other successful clinics must be isolated from these claims.

A client of ours had four dental offices in different locations. All of the offices were held in one corporation. Business at one of the locations slowed down substantially. That clinic became a financial drain on the others, absorbing all of the available cash in the company. Eventually, the corporation had to file for bankruptcy, wiping out all of the equity that had been built up.

Our approach would have been to have each office separately incorporated. Then, if one location were to falter, it would not drag down the others. A judgment creditor of one corporation would not be able to reach the assets of the other companies. An extreme illustration of this is the taxicab company which separately incorporated twenty-six different taxis.

This strategy is also useful for a company that manufactures or wholesales different product lines. Companies in the pharmaceutical business face enormous potential liability for many types of drugs and medical devices. Several years ago A. H. Robbins was forced into bankruptcy by liability in connection with the IUDs it produced. Dow Corning had similar problems from the liability associated with the silicone breast implants. Whenever a particular product may be hazardous, using multiple corporations is an effective technique for insulating each separate product from liability caused by another.