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We started an "I.T. Solutions" company which offers services in many different areas (software development, web design, e-commerce, consulting, etc.). The profits from these services are used to fund the development of our enterprise software. My questions are:

  • When the enterprise software is launched should we create a new company for it, having our current business as a parent company? What are the advantages and disadvantages for doing this? Do a lot of companies do this?

  • How does these relationships between parent and child companies work exactly?

Or should we just keep it simple and stick with the setup we have now. (Marketing the product on it's own of course).

Hope that makes sense.

Thanks.

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4 Answers

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Unless you have good, strong reasons to kick-off a different entity (as already noted above), I'd lean strongly towards keeping things simple.

The structural complexity is usually just not worth it. This "entity per project" is common in some industries (like real estate), but not in the software world.

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up vote 7 down vote

I debated this question for several months in my own business. We are about to launch an application, and trying to decide if we should do it under a separate entity. Ultimately for me it came down to a couple of things:

1) Was I worried about getting sued in one company, and so wanted separate assets to keep from losing everything? 2) Was I planning on selling one of the businesses, so separating them early would make the sale easier later?

I'm not worried about getting sued (plus I have E&O insurance), and I'm not on selling either of the businesses. So for me, creating a separate entity was an unnecessary expense.

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+1 to all this. Unless there's a good reason, don't bother. – Jason Dec 8 '09 at 21:02
up vote 2 down vote

Brian makes some good points. To expand on his answer, the only reason to form a separate entity would be to:

  1. Spin it off: It's a lot cleaner to already have a P&L just for the business you want to sell. It makes the revenue claims and expenses a lot easier to justify.
  2. Contain Liability: As long as the entity has it's own management structure and is operating independently, then you can contain liability. If management is "shared", then you could have a potential problem. If you are really worried about that, consult a lawyer.
  3. Create focus: Having a separate division or group will focus that group to be successful. That does have advantages in terms of managing the product for success.

Lots of companies do this but they are usually big companies that have acquired other companies. Johnson and Johnson and Cisco come to mind as companies that have wholly owned subsidiaries that go after specific markets.

Usually, each subsidiary has it's own management and operates as an independent company. The revenues and losses are reported up to the parent company since the parent company owns the whole thing. In most cases, the subsidiary can stand on it's own, which means it has all of the functions of a real company (accounting, board of directions, operations, etc).

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up vote 0 down vote

If I made a new company (and that is a BIG IF) I probably would not subordinate one to the other - I would keep them separate. If there was sufficient reason to make a new entity i don't see how it would make sense then to have them formally related.

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