Companies sometimes spin off business opportunities into independent subsidiaries to limit the liability exposure of the main entity. This move can protect an entrepreneur's primary business and its assets from lawsuits arising from actions of the subsidiary. However, the protection doesn't go both ways, so legal actions filed against the parent can negatively affect the subsidiary and its assets.

The Parent-Subsidiary Relationship

A subsidiary business is owned wholly or in part by a parent corporation or limited liability company. The parent holds shares of stock or an ownership percentage in the subsidiary, just like any other corporate shareholder or LLC member. The relationship exists to prevent liability associated with the business of the subsidiary from bleeding over into the business of the parent. For example, a movie production company may incorporate each film project as a separate subsidiary business so if the movie flops, creditors can only go after assets associated with a single film and can't reach the assets of the movie production company parent.

Inverse Liability Protection

The liability protection that is the basis of the parent-subsidiary relationship doesn't flow both ways. If the parent company is sued, its ownership interests in subsidiary businesses are considered the company's personal property. Creditors can attempt to attach ownership interests in other businesses and, depending upon the debt collection laws in the state where the lawsuit is filed, may or may not succeed.

Attaching Shares of Stock

States typically allow creditors to seize any shares of stock a debtor may own to satisfy a judgment. A parent company's shares of stock in a subsidiary corporation can be fair game in debt-collection efforts, ultimately allowing the creditor to take control of the subsidiary and its assets. However, the right to go after a parent's stock in another company doesn't automatically allow the parent's creditor to disregard the barrier between independent business entities at will and cherry pick subsidiary assets in repayment. It's more likely that the parent would liquidate the subsidiary's assets or offer an asset in repayment before such action would become an issue.

Ownership Interests in LLCs

State laws differ regarding the right of creditors to go after ownership interests or assets of a business organized as an LLC. In most states, creditors can get a court order to attach the profits of an owner's ownership interest but can't take possession of the interest or affect the management of the company. If the subsidiary is an LLC, it's unlikely that a creditor of the parent can force the sale of the subsidiary's assets.

Alter Ego Exception

If the parent and subsidiary companies don't maintain an appropriate level of independence from each other, a court can rule that they are effectively one company, allowing creditors to attach the assets of both indiscriminately. Courts look at things such as parent-subsidiary commingling of funds and a parent's undue operational control over the subsidiary to decide if the subsidiary is merely an alter ego of the parent, rather than a separate legal entity.