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The Subsidiary Shield

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If one part of your business carries greater liability risk than others, it may be possible to protect the rest of your company by spinning it off as aseparate corporation. For it to hold legal water, though, the new subsidiary must be a truly independent corporation.

That means several things: the subsidiary must function independently in its day-to-day operations; it must have sufficient capital of its own to carry on itsbusiness; it must have the authority to act in its own best interests, even if they conflict with those of the parent company; customers and other outsiders mustunderstand that the corporations are separate entities and must know which one they're dealing with; and each corporation must observe all the formalities offederal, state, and local laws, as well as its own by-laws.

Of course, would-be plaintiffs may still sue the parent as well as the subsidiary. But if you follow the rules, the courts generally accept that you've made thesubsidiary a bona fide legal entity and a viable shield for other parts of your business.




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