January 31, 2019
This is a follow up to a previous blog - Single Business Enterprise Theory f/k/a Amalgamation - that provided an overview of recent South Carolina appellate cases discussing and applying the test for considering multiple business entities as one in litigation.
By way of recap, in Pertuis v. Front Roe Restaurants, Inc., the South Carolina Supreme Court defined the theory as follows:
We formally recognize today this single business enterprise theory, and in doing so, we acknowledge that corporations are often formed for the purpose of shielding shareholders from individual liability; there is nothing remotely nefarious in doing that. For this reason, the single business enterprise theory requires a showing of more than the various entities' operations are intertwined. Combining multiple corporate entities into a single business enterprise requires further evidence of bad faith, abuse, fraud, wrongdoing, or injustice resulting from the blurring of the entities' legal distinctions.
While not in any way exhaustive, we have listed 10 suggestions for avoiding treatment as a single business enterprise.
- Treat each company as a separate financial entity and account for all transactions between the companies accordingly.
- Ensure that all contracts and documents executed by the company are in the company’s name and that individuals only sign documents in their capacity as a member or officer of the company.
- Provide sufficient capitalization in light of the particular business of each company.
- Do not favor individual owners or other owned entities over creditors.
- Carry general liability insurance and other types of insurance coverage to protect each company. Insurance will not only provide the direct benefit of satisfying covered losses, but will also strengthen the case that the company adequately provided for reasonably anticipated business risks. Document each company’s decisions as to the appropriate level of reserves and/or insurance coverage.
- Document authorizations of significant actions and decisions of each company.
- Maintain thorough financial records.
- Individuals acting on behalf of the company should take care to identify themselves as agents of the company.
- To the extent that the owner or employees of the owner provide services on behalf of the entity or entities, consider entering into management or service agreements and paying appropriate fees for such services.
- Exercise diligence in following these recommendations on an ongoing basis.
One last thought, resist the temptation to use the word “amalgamated” in any of the company names.
Authors: Sarah Spruill and Philip Land
This article is intended to provide general information on the topics covered. The contents of this article are not intended and should not be construed as legal advice or legal opinions. The Reader should consult with legal counsel to obtain legal advice regarding particular situations. Any result the law firm and/or its attorneys may have achieved on behalf of clients in other matters does not necessarily indicate similar results can be obtained for other clients.