4 ms·

I was actually just wondering what is stopping companies from forming separate LLCs for every product line or even product? I mean at some point the administrat

by nimos 4y ago

I was actually just wondering what is stopping companies from forming separate LLCs for every product line or even product? I mean at some point the administrative overhead is not worth it but 100-1000 individual LLCs seems pretty trivial to manage for a fortune 500 company and that cuts your liability massively if you are able to effectively distribute assets.

kasey_junk 4y ago
I’ve worked in environments where legal entities were kept in a database because there were enough of them to make it worthwhile.
icelancer 4y ago
This is effectively how all real estate works. I'm not quite sure why this doesn't work for things like software, but from my understanding owning actual property makes it significantly more possible / legal.
Kon-Peki 4y ago
For a corporation with thousands of employees and R&D labs, etc, the administrative overhead has to be massive. Like working for Alphabet times 100. An employee would be switching their legal employer every few months, every time they switch teams, all the time; new payroll, new health plan enrollment, etc. People would just Nope the F out of that place.
- paragraft 4y ago
  Surely you'd just be employed by the internal HR company and on the books each product company would be contracting your services according to timesheets.
  - Kon-Peki 4y ago
    Yeah, but then the internal HR company has all the money and also has all the liability. So you've gained nothing for all that administrative headache. Real estate is a special situation with lots of subcontracting. They can make it work. In big multi-unit residential cities like NYC and Chicago, the doorman in that high-rise is in a union that provides all his benefits and has a set pay scale. The building ownership just contracts all that stuff out to the union. But that doorman can go work in some other building owned by some other owner too. You don't want that happening with your corporate employees developing and managing your consumer products.
  - treis 4y ago
    It's pretty easy to pierce the corporate veil for these separate but not really separate LLCs. They have to be bona fide separate companies to enjoy the LLC protection.
- Xcelerate 4y ago
  Sounds like you’ve made a valid prediction for a future consisting of high frequency individual tax loopholes to me.
nonfamous 4y ago
This is essentially what movie studios do: a separate, new company produces each film. (Here though the main goal isn’t liability, it’s to insulate the BigCo from losses, and avoid paying those that made the film that don’t have star contracts.)
KMag 4y ago
It's pretty common in the financial world. The US government doesn't offer zero-coupon bonds, so the big banks create special purpose vehicles that buy US government bonds, split the cash flows into the strips and the zero-coupon bonds, and sell them separately. If some pork belly futures trader wipes out the bank, at least in theory, the special purpose vehicle outlives the rest of the bank and keeps paying out those cash flows, and the pork belly creditors don't get those zero-coupon bonds you bought. At least, I think that's the way it's supposed to work. I used to work at Goldman, and at some point, someone told me that the number of legal entities was roughly the number of employees. I'm not sure how true that was, but I'd believe it. There are some good reasons to allow these separate legal entities, to allow orderly partial collapses of businesses to reduce the risk of cascading systemic failures. There's also something to be said about either keeping businesses small enough that failure of a handful of them won't collapse markets, or else single-purpose enough that they have less direct effects on multiple markets. The flip side is that diversification across markets should tend to stabilize firms, and larger firms are also more able to effectively diversify.

by nimos 4y ago

kasey_junk 4y ago

I’ve worked in environments where legal entities were kept in a database because there were enough of them to make it worthwhile.

icelancer 4y ago

This is effectively how all real estate works. I'm not quite sure why this doesn't work for things like software, but from my understanding owning actual property makes it significantly more possible / legal.

Kon-Peki 4y ago

For a corporation with thousands of employees and R&D labs, etc, the administrative overhead has to be massive. Like working for Alphabet times 100. An employee would be switching their legal employer every few months, every time they switch teams, all the time; new payroll, new health plan enrollment, etc. People would just Nope the F out of that place.

paragraft 4y ago
Surely you'd just be employed by the internal HR company and on the books each product company would be contracting your services according to timesheets.
- Kon-Peki 4y ago
  Yeah, but then the internal HR company has all the money and also has all the liability. So you've gained nothing for all that administrative headache. Real estate is a special situation with lots of subcontracting. They can make it work. In big multi-unit residential cities like NYC and Chicago, the doorman in that high-rise is in a union that provides all his benefits and has a set pay scale. The building ownership just contracts all that stuff out to the union. But that doorman can go work in some other building owned by some other owner too. You don't want that happening with your corporate employees developing and managing your consumer products.
- treis 4y ago
  It's pretty easy to pierce the corporate veil for these separate but not really separate LLCs. They have to be bona fide separate companies to enjoy the LLC protection.
Xcelerate 4y ago
Sounds like you’ve made a valid prediction for a future consisting of high frequency individual tax loopholes to me.

nonfamous 4y ago

This is essentially what movie studios do: a separate, new company produces each film. (Here though the main goal isn’t liability, it’s to insulate the BigCo from losses, and avoid paying those that made the film that don’t have star contracts.)

KMag 4y ago

It's pretty common in the financial world. The US government doesn't offer zero-coupon bonds, so the big banks create special purpose vehicles that buy US government bonds, split the cash flows into the strips and the zero-coupon bonds, and sell them separately. If some pork belly futures trader wipes out the bank, at least in theory, the special purpose vehicle outlives the rest of the bank and keeps paying out those cash flows, and the pork belly creditors don't get those zero-coupon bonds you bought. At least, I think that's the way it's supposed to work. I used to work at Goldman, and at some point, someone told me that the number of legal entities was roughly the number of employees. I'm not sure how true that was, but I'd believe it. There are some good reasons to allow these separate legal entities, to allow orderly partial collapses of businesses to reduce the risk of cascading systemic failures. There's also something to be said about either keeping businesses small enough that failure of a handful of them won't collapse markets, or else single-purpose enough that they have less direct effects on multiple markets. The flip side is that diversification across markets should tend to stabilize firms, and larger firms are also more able to effectively diversify.