BUSINESS ENTITIES – Part 5: Blended Entities
by BPE Attorneys Keith Dunnagan and Matthew Kirkpatrick
In the last article we discussed limited liability companies and have thus far also looked at corporations and partnership models as well. In this last installment on business entities we will look at what I call “Blended Entities”.
In reality all a Blended Entity is – is a corporate structure that uses at least 2 types of business structures to operate a business. These types of entities are often used in professional service business models where the limited liability company is not available. The purpose is to obtain the flexibility of the partnership in management while at the same time maintaining third party liability protection, to the extent possible, that would exist with a corporation. As we discussed in the previous article, LLCs provide much of this structure and so the natural question is why is this model even needed. In reality this model is used almost exclusively by professional service corporations that as of now are statutorily not allowed to use the LLC business model.
The business entity often is a partnership comprised of S-Corporations that act as the partners. This allows the business fluidity so that each partner corporation (through their designee) can operate the partnership business. At the same time, because the service providing entity is partnership profits can be contractually split along lines that are different from ownership interest. Additionally, the S-Corporations act as the shield from third party liability. Where this is especially important is in professional malpractice cases. Under the law of California, professional malpractice cannot be avoided by using the shield of a corporation. However, the potential in the blended entity is rather than having complete joint and several liability among the general partners in a partnership, the corporate partners can to some degree act as a shield for the non-malpracticing partners. It can be a way to limit tangential exposure for the malpractice of a partner. This has been finding traction and favor in the professional business structures for the past several years.
There are downfalls to Blended Entities though. The main one is cost. Because of the multitude of companies and business structures involved, cost is significantly increased because you are maintaining not only a set of books and tax records for a partnership but also each of the individual S-Corporations as well. Additionally, such a structure can complicate payroll for the partners. The individual owners are not partners in the partnership. It is their corporations that are the partners, so wages and draws cannot be paid directly to the individual without jeopardizing the corporate shield. Distributions have to flow in a pass through fashion from the partnership to the S-Corporations and then paid either as w-2 wages to the owner or as dividends. These are complications that some do not want to consider and can be a deterrent to this type of business structure.
However, the third party liability protection potential along with profit distribution model can, in the right business model, provide significant advantages. The Blended Entity is not the right entity for every professional business but in the right situation can be a valuable tool to understand.
The attorneys at BPE Law Group have been providing advice and assistance in selecting and forming corporate entities collectively for well over 30 years. If you are looking for advice on a business structure, BPE would be honored to assist in the formation of your company.
As was stated at the beginning of this series, this article was taken from a presentation given to Brokers Training Institute at the Sacramento Association of Realtors in April 2016. Our attorneys are available to provide seminars on corporate topics as well and would be happy to chat about presenting to your group.
If you have any further questions, please feel free to contact me at firstname.lastname@example.org or, if you need help now, please call our office at (916) 966-2260 to set up a consultation.
This article is not intended to be legal advice, and should not be taken as legal advice. Every case requires review of specific facts and history, and a formal agreement for service. Please feel free to contact us if you need legal advice and are interested in seeing if we can help you.