Separate Corporations

 Published: July 7, 2021

By: Anthony DeWitt, JD, RRT, FAARC

 

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Corporations often have numerous separate subsidiary corporations that they own outright, and where the people who control the parent corporation appoint the board that runs the subsidiary corporations. However, just because a corporation owns another corporation and can generally tell it what to do, the corporations are entirely separate entities from the legal perspective.

An excellent example of this is found in skilled long-term care facilities. A corporation, we’ll call it “A” for simplicity, owns a plot of ground at the east end of town. On that land it builds a big, beautiful building with lots of separate rooms to house nursing home patients, and furnishes those rooms with all the latest medical equipment.

Corporation “B,” however, does not own the land but does own a license to operate a skilled nursing facility, and it leases the building of Corporation A to run its nursing home. Corporation B pays A $25,000 a month in lease payments, representing about 95% of its revenue minus its expenses. Corporation A takes the money from Corporation B and pays the bank loan on the property, which takes about 80% of the funds paid to Corporation A by B. At the end of the month, the leftover 20% gets paid to Corporation “C,” which owns both corporations. Mr. John Doe, who owns Corporation C, also owns A and B indirectly through his ownership of C.

Now, why in the world would someone go to all that trouble with money shuffling back and forth between corporations? Simple: if Corporation B, which operates the nursing home, gets sued for malpractice, it can confess judgment (meaning it can say “go ahead, hit me for $15,000,000”). When the plaintiff comes to collect, it can say “sorry, no assets.” That’s because it has $78.55 left in the bank after paying its employees and its rent. It does not own the land, the building, or any of the beds, bedpans, or other medical equipment. That all belongs to Corporation A. If Corporation A gets sued, it can say “you can’t sue us, we didn’t commit malpractice.”

Lawyers who try to “pierce the corporate veil” in a situation like that often have a challenging time doing so because if all three corporations’ records are well-kept, there won’t be any legal reason to challenge the separateness of the organizations. They get to act like three independent corporations doing business at arms-length, even though they are related through their common ownership. As the Delaware Supreme Court recently explained, “Delaware courts take the corporate form and corporate formalities very seriously” because it would “upset the contractual expectations” of the parties to conflate separate entities. Culverhouse v. Paulson & Co., 133 A.3d 195, 199–200 (Del. 2016). It is only an exceptional case where a court will disregard the corporate form.

Separate organizations are a feature in the skilled nursing situation, not a bug! It allows the home’s operating corporation to operate without having to pay insurance because it has nothing to lose.

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However, as odd as it may sound, there are some significant advantages and excellent reasons why corporate entities would want to organize themselves into separate corporations and act as independent corporations. No better example can be found than the American Association of Respiratory Care and the American Respiratory Care Foundation.

The AARC is a trade organization organized under 26 United States Code 501(c)(6), which exempts it from corporate income tax if it meets specific requirements as a trade organization. The AARC’s membership-driven scope of governance, with elected members serving in the House of Delegates and Board of Directors, represents the hundreds of thousands of respiratory therapists in the United States (and worldwide). In addition, it supports the professionals it serves through education and lobbying efforts. In short, it is a member-driven organization that exists to serve its membership.

The American Respiratory Care Foundation, on the other hand, is organized under 26 United States Code 501(c)(3) or as a charitable foundation. Its job is philanthropy or giving away its money for specific charitable purposes. A wholly independent board of trustees governs it. The Foundation was originally incorporated at the behest of the AARC, with its original board appointed from the AARC. Since then, the corporation amended its bylaws. Its board is now elected by the serving board members and comprises individuals from industry, respiratory care management, respiratory care education, and the public at large.

As many of you may know, I serve on the board of trustees for the ARCF and have for five years. In that role, I have taken part in numerous fundraisers and decisions to fund advances in the art and science of respiratory care. In addition, the ARCF funds education through scholarships and grants, research through its support of the AARC’s Respiratory Care Journal Conference, and assists with other notable philanthropic efforts to assist therapists and the profession globally. The board includes current respiratory therapists, former respiratory therapists, physicians, and patient advocates. The board meets at least four times every year, usually once in person (although last year’s meeting was canceled due to COVID-19).

Although the ARCF awards are traditionally given out at the AARC Annual Congress, the awards given by the ARCF are not funded by the AARC but rather recognize therapists and others who advance the science of respiratory care. Many of you have seen the line on the AARC membership form asking for contributions to the ARCF but may not have recognized that the ARCF is indeed a separate organization.

While many believe that the ARCF is a branch of the AARC, that is not the case. They are two separate, independent organizations, each with their own boards of trustees, each with separate and specific tax statuses and corporate missions, and with no common ownership. While the organizations share a common interest in promoting and supporting the respiratory care industry and maintain a very close working relationship, they are indeed separate entities. The ARCF purchases support services from the AARC, and the AARC provides services and frequently interacts with the ARCF on special projects, but all of that is done through contracts negotiated by each organization on an arms-length basis just like would be done by any other two independent corporations.

For more information, visit the ARCF website to learn about the organization and what the ARCF does for you.

Email newsroom@aarc.org with questions or comments, we’d love to hear from you.

Anthony is an attorney and a partner in the firm Bartimus, Frickleton, Robertson, PC, and resides in Opelika, AL. He also published two books and numerous legal journal articles. This article is not a substitute for legal advice.

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