When expanding a transportation services business, you may want to incorporate a new legal entity to carry on these new operations, rather than having your brokerage and carrier divisions set up in the same corporation. Here are six reasons why:
- Protect assets in litigation – If all a company’s power units and trailers are owned by the same entity that is also carrying on business as a brokerage, and the brokerage is subject to a large claim, those assets could be seized – particularly if a judgment goes unpaid.
- Avoid blurring the lines for business customers – Using two separate corporations with different names will help customers distinguish between carrier and broker operations. This will help customers understand which division they are engaging. In the event of a cargo claim, this could help keep customers from arguing the brokerage business should be liable as a carrier for lost or damaged cargo when the company was actually contracted as a broker or agent and didn’t engage in any transportation itself. Any argument that the a company should be directly liable as a carrier will be weakened if the company can point to a separate entity that carries on the other line of business.
- Avoid exposure to property damage or personal injuries — Load brokers are generally not directly liable for property damage and personal injury since they are not actually operating any vehicles. But this responsibility could be blurred after an incident if one entity is being used to carry on both operations.
- Ensure the proper contract is used – Having separate legal entities avoids the inadvertent use of the wrong type of contract, which is an issue we regularly encounter. Since the roles of broker and carrier are different, contract obligations should also differ. Typically, each entity will have all its own contracts and shipping documents that accurately reflect roles, services, obligations, insurance requirements, and circumstances under which it will take on liability for cargo damage. Using one entity to carry on both lines of business creates the likelihood of using the wrong contract template – further “blurring the lines” for customers – or a customer providing its own contract that fails to properly describe the relationship. If this mistake is missed, it could see a brokerage business taking on carrier-like liability obligations when it would otherwise only be liable for negligent selection of the carrier.
- Avoid cabotage allegations in the U.S. – A brokerage business might arrange for a carrier to transport shipments from point to point with the U.S. However, if the carrier business operates within the same legal entity – and there is any confusion about the company’s role – someone might argue the company is violating U.S. cabotage laws. The carrier business may not be entitled to move point-to-point shipments in the U.S. without meeting certain legal requirements.
- Make it easier to sell the business – If a company wants to sell off one of the two business lines, the process can be simplified if the operations fall under separate legal entities. This avoids having to carve out a particular line of business for the sale – making it easier to establish a business value, complete diligence, structure the transaction and pre-closing steps, and transfer permits, among other things.
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