Fundamentals of Administering Nested Funding Business Entities
By: Barry E. Haimo, Esq.
March 6, 2022
Forming nested funding business entities is a big move. And administering them properly is critical to successfully enjoying many asset protection benefits. Here are some helpful fundamental tips to make sure you follow:
Observing Corporate Formalities
It’s important that you realize that your business entity is a living breathing creation. It has to be maintained and administered properly. Remember to:
- Have your annual meeting each year and be sure to give proper notice to those involved.
- Every year, prepare your annual meeting minutes reflecting the resolutions passed at the meeting.
Don’t Commingle Assets
- Do not double dip or commingle assets in your entity.
- Keep business and personal assets separate.
- Have separate bank accounts and books for each business entity.
- Do not pay personal bills with the business funds.
- Do not pay one business’s expenses with another business’s assets.
- Keep everything separate and organized.
Similarly, do not pay business expenses with personal funds. Keep them separate. Otherwise, a creditor can pierce through the limited liability protection you may have created the entity in the first place.
Proper Nested Funding and Distributing Profits and Losses
Funding your entity should be done pursuant to the governing document. That may be the operating agreement if you have a LLC, or bylaws and/or shareholder’s agreements for corporations. Beyond the scope of the operating agreement, be sure to make contributions to the entity only from the owner of the entity.
For example, if the owner is a trust, make sure the trusts is funded first, and then transfer funds from the trust to the entity. Make sure to follow the chain of ownership. And if you have holding company parent entity that wholly owns subsidiary companies, be sure to fund the parent company first through its owner. Then have the parent company fund its subsidiary entities directly. It’s important to follow the chain of ownership.
Similarly, if you are distributing cash or other assets from a company as distributions to partners, make sure to pay its owner. If you want to withdraw funds from a subsidiary company and it’s characterized as a distribution to partner (rather than salary), be sure to pay the parent company first before further distributing those funds to the parent company’s owner.
Keep Separate Books for Each Entity
It’s important that each entity keep its own books and records. This helps to strengthen the legality and independence of the entity. Records do not need to be prepared by your attorney if you do good record keeping.
Similarly, the books do not need to be prepared by a book keeper, accountant or CPA if you can keep good records. Just remember to keep separate books and records for each entity.
Originally published 11/04/2016. Updated 03/06/2022.
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