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Startup Company Asset Isolation

Operating startup companies can be used to isolate high risk activities. The most common form of segregation is to use an operating startup company and holding company. The holding company may own substantial assets including the building and land from which the operating startup company carries on business and any intellectual property including trademarks, patents and technology. This allows for vertical segregation.

Another structure might use three startup companies. One startup company would operate the primary business. A second holding company would own the building and land from which the startup operates. A third startup company would own the equipment and intellectual property (patents, trademarks, trade secrets) used by the operating business. Each company might be a party to a lease, license or other agreements setting out their respective rights and obligations. The startup company that owns the land and buildings leases them to the operating startup company. The startup company that owns the equipment leases the equipment to the operating startup company and licenses the associated intellectual property. In the event of the failure of the operating startup company, the lease and licensed assets would not be available to the creditors of the operating startup company.

The isolation of assets may also be advisable where a startup company is successfully operating from one location and wishes to expand to a second location. Consideration should be given to incorporation of the new startup company to acquire assets and operate from the new location. From a tax prospective, there is a temptation to simply expand and operate both business locations under the same startup company. The new location will likely take time to become profitable and loses on the interim at the new location could be written off against profits from the existing startup's business location. However, a separate corporate entity provides protection if business at the new location is not successful. The unprofitable location can be closed without adversely affecting the original business of the startup and its assets. In these circumstances, the two startup companies should in fact be operated on a segregated basis. Inventory should be purchased in the name of each legal entity and used by each for its own purposes of its own business. Invoices received at each location should be routinely reviewed as suppliers may confuse the proper names of related startups or intentionally invoice the strongest business in the event of concerns. Although this may not appear to be a significant issue while the startups are operating, suppliers will not likely hesitate in raising convenient claims in the event of a business failure.

A variation of this strategy may be used by a startup with many locations. One company might hold all of the leases. A second company might be used as a purchasing entity to acquire the inventory from suppliers. A separate company would operate each location and sell the inventory and receivables.