Divisions of a Corporation (Division)

A creditor that extends credit to a division of a corporation does not need to analyze that division as if it were a separate legal entity.  From the creditor's perspective, the key point is this: A division is not a separate legal entity. A division is an artificial classification used by corporations to make the management of the business or the accounting process easier.  Extending credit to a division is indistinguishable from and in fact identical to extending credit to the corporation itself.  This means that if the the corporation is creditworthy, the division is also creditworthy - and by the same rationale if the corporation is not creditworthy, neither is the division. 

This is true irrespective of how well the division may be performing financially or how rapidly or well the division pays outstanding invoices.  If the corporation files for bankruptcy protection, all of its divisions are automatically included in the bankruptcy filing.  The same would apply to an Assignment for the Benefit of Creditors, or any other action that would limit the debtor's ability to pay and a creditor's ability to collect an outstanding debt.

Reprinted with the permission of Credit Research Foundation.

Edited by Michael C. Dennis.  Mr. Dennis is a consultant and the author of "1001 Collections Tools and Tips."  E-mail questions or comments to mcdennis13@yahoo.com