Can You Divide Your Company into Smaller Companies to Avoid Legal Compliance?

Many laws, including employment laws having to do with minimum wage, disability accommodations, medical leave, or workers compensation often depend upon a company having a minimum number of employees. That means that if your business has under the minimum amount you don’t have to worry about complying with these laws, or worse, worry about being sued for violating them.

But that leads to an interesting question: if you do have enough employees that you must comply with and be subject to these employment laws or other legal requirements, could you legally just split your company into two or more smaller companies, each with below the minimum number of employees?

Could you conceivably continue to operate as normal, without worrying about being sued, or the risk or expense of lawsuits?

Are You Really One Company?

It sounds clever but in most cases, it simply will not work. You will still be obligated to comply with various state and federal laws, even if your now-split, supposedly separate companies each would individually be too small to have to comply with these laws.

The problem is that courts don’t just look at the legal entities. In other words, the courts don’t care that your one big company is legally registered with your home state, as 10 smaller companies. Rather, the court is going to look at your company (all of your companies) as a whole, and see if the employees are all really working for the same company.

Books are records matter as well. Do these companies have the same, or separate bank accounts? Is title to property held separately under their names? Are contracts signed for and on behalf of these companies individually or are all company contracts still signed under the one main, larger umbrella company?

Courts will also look at authority and control. Are all the small companies controlled by the same management or policies? Are the boards of directors the same? Are the owners the same? Are all the employees physically working in the same location? If the answer is yes, then the fact that your company is legally a bunch of small companies, won’t matter.

When Splitting Into Multiple Companies Might Help

That’s not to say there are no reasons for splitting one large company into multiple smaller ones. Bookkeeping, taxes, liabilities, protection of trade secrets, and other reasons, all may be good reasons to split a large company into multiple small ones.

And, there are times when you really do want your company split, and when you can do so for various legal and legitimate reasons.

The benefits are something to discuss with your business lawyers—but doing this to evade having to comply with federal or state laws, usually will not work.

Call our Fort Lauderdale business attorneys at Sweeney Law P.A. at 954-440-3993 for help with complying with business laws that affect your business.