Resources for Lenders, Community Bankers & Finance Professionals

Many borrowers will use interrelated companies to insulate their net worth and lower litigation risk. Owners of a corporation or a limited liability company enjoy a level of protection known as the corporate veil. This usually keeps creditors from accessing the owner's personal assets to pay corporate obligations. If the owner has an interest in more than one company, he may want to insulate each company from the actions of the other. Additionally, each company may have different ownership interests.

One example is a trucking company. Often, the equipment is owned in a different company and leased to the operating company. If the trucking company has a catastrophic event, the equipment (trucks and trailers) have a layer of protection as they are owned in a different entity.* If the trucking company closes, the equipment can be sold or leased to another business. 

In order to properly analyze the situation, two levels of analysis should occur. First, the individual company that is a borrower should be analyzed. Second, the consolidated entity (including both companies) should be reviewed. Many times an individual piece of the business may appear weak but the overall consolidated entity may actually be strong. 

                                                             Operating Entity               Leasing Company       Consolidated
Net Income before depreciation           $ 5,000                             $120,000                     $125,000
Depreciation Expense                              10,000                                 50,000                          60,000
Net Income/(Loss)                                    ($5,000)                          $   70,000                  $      65,000


In the previous example, the operating entity generated a loss of ($5,000), but on a combined basis the companies generated a profit of $65,000 after depreciation expense of $60,000.  The most useful statements in these situations are consolidating statements, which eliminate intercompany transactions. 

Consolidating statements may incorporate multiple entities. Each company should be analyzed separately and then on a consolidated basis.  


* See Piercing the Corporate Veil