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Related Companies; Related Businesses
Two or more businesses that have common ownership are referred to as related entities. Common ownership means that one or more of the stockholders of one corporation also own shares in the other corporation. Thus, the two companies are related through common ownership. Among other things, related entities may conduct business with one another, may extend credit one to the other, and may make loans to each other.
From a creditor's point of view, the fact that corporations are related entities does not mean that one company is responsible for the debts of the other. In fact, the opposite is true. The assets of one of the related entities cannot be attached or leveraged or sold to pay the debts of a related entity.
One common type of related entity in the United States is the parent-subsidiary relationship. Companies often conduct their business operations through a corporate group structure consisting of one or more wholly-owned subsidiaries. Under this arrangement, the financial condition of the parent company and its wholly owned subsidiaries are reported together in consolidated financial statements. Despite this form of financial reporting, a parent company is not obligated to pay creditors of the subsidiary in the event of delay or default by the subsidiary corporation.
© 2009 by Michael C. Dennis. All Rights Reserved. Michael is the author of "Credit and Collection Handbook."