For a host of legitimate reasons, some Texas business organizations decide to divide their overall operations into two or more legal entities, rather than have all activity performed by one of them. For example, federal tax strategies may favor owning commercial real estate and improvements in one type entity – perhaps an LLC – while other legal and business concerns favor the creation of a different type of legal entity to operate the actual business. Moreover, fledgling business operations are usually more risky than established enterprises; owners of the new venture may desire to separate the assets as much as possible, just in case something goes wrong.
A recent decision from a bankruptcy court, Lassman v. Cameron Constr. LLC [(In re Cameron Construction & Roofing Co.), 2016 Bankr. LEXIS 4271, 63 Bankr. Ct. Dec. 119 (D. Mass., Dec. 14, 2016)], shows the pitfalls that can occur when an owner fails to maintain adequate separation between his or her related business enterprises.
In an apparent effort to insulate part of his business from the risks of the actual operation, the owner set up two separate corporations: One to own and manage the real estate and improvements necessary to support a roofing business; the other to operate the roofing business itself. When the roofing business failed, the owner filed corporate bankruptcy and the bankruptcy court appointed a liquidating trustee. The trustee sought to reach the assets of the real estate enterprise, contending that there was no real separation between the two business entities and that the full assets of the business – real estate and roofing – should be sold for the benefit of creditors.
In spite of the fact that there was some true degree of separation – the firms issued separate W-2s, had separate bank accounts, and filed separate annual reports with the state authorities, the bankruptcy court ruled that the two operations should be treated as one.
The legal doctrine utilized by the bankruptcy court in consolidating the roofing company’s assets is considerably muddled within Texas. Under at least some circumstances, two intermediate Texas appellate courts have ignored the separation between two legal entities, if required to do so for equitable purposes, such as creditors’ rights. The Supreme Court of Texas so far, however, has not weighed in on the issue. Generally speaking, Texas courts examine a number of factors to make a decision regarding separateness, including the following:
While Texas courts consider the factors indicated above (and sometimes others as well), it appears likely that the totality of the circumstances will normally control. It is possible to separate business enterprises in Texas, if that is desirable for the business owner. But attention to detail in managing and running the separate enterprises is crucial. The overriding idea is that if the owner doesn’t treat the entities as separate, then the court won’t either. Most businesses with one or more related entities seek periodic legal counsel from an experienced business attorney in order to minimize the risks that creditors will be able to peer behind the veil separating the business operations.
Paul Romano & Kenny Sumner have more than 20 years of combined experience in litigation and transactional law. Whether it’s in the office – or the courtroom – they know exactly how to handle tough legal situations. We have helped many Texas businesses set up the type of legal entity suited for their operations. We have drafted countless contracts and agreements, and have assisted in the purchase and sale of assets and business enterprises. We’ve aggressively gone to court, when necessary, in order to protect and promote the rights of our clients.
The law firm of Romano & Sumner is committed to completing your transaction or case in a timely manner. We answer questions in a language that you can understand. We provide individualized attention to your situation. We respond promptly to phone calls and email communications. Call us at 281-242-0995 or complete our online contact form.
Romano & Sumner – Sugar Land, TX Attorneys