Michael Ioane

Article IV

SUMMARY GUIDE ARTICLE

Guide: Activity Separation Strategy

This guide provides a practical reference for designing and implementing business activity separation strategies. The frameworks here reflect Michael Ioane’s approach to entity layering, operational vs ownership entity design, and the governance discipline required to maintain effective separation over time.

Activity and Asset Classification

Begin the separation design process by classifying all business activities and assets by risk profile and function:

• High-liability operational activities: customer-facing services, professional services delivery, construction, manufacturing, retail and hospitality; these activities should be contained in dedicated operating entities
• Low-liability operational activities: administrative functions, back-office operations, and support activities with minimal direct customer exposure; these may be consolidated in a single operating entity or managed centrally
• Long-term asset holdings: real property, equipment with significant value, intellectual property, and financial investments; these should be held in dedicated holding entities separate from all operational activity
• Equity interests: the ownership interests in operating entities should be held by holding entities or by the owner through a structure that provides an additional layer of separation from operating liability

Entity Structure Design Priorities

Design the entity structure to match the activity and asset classification:

• One holding entity for each distinct category of valuable assets, or a single holding entity for all long-term assets if the asset categories do not warrant separate treatment
• One operating entity for each distinct category of business activity with a materially different risk profile
• Intercompany agreements between each pair of related entities, documenting the commercial terms of their relationship at arm’s length
• Governance structures for each entity that reflect the entity’s specific function and risk profile
• Financial separation between all entities: dedicated bank accounts, separate financial records, and correctly categorized intercompany financial flows

Intercompany Agreement Requirements

Every relationship between related entities in a layered structure must be governed by a written intercompany agreement. Each agreement should address:

• Identification of the specific assets covered or services provided
• Commercial terms: lease rate, license fee, or service fee set at arm’s length
• Payment schedule and documentation requirements
• Term and renewal or termination conditions
• Signatures of authorized representatives of each entity
• Annual review to confirm terms remain at arm’s length

Intercompany arrangements that are not documented in writing, or that are documented at non-arm’s length terms, are vulnerable to challenge and may be disregarded by courts examining the structure.

Governance Separation Checklist

Maintain genuine governance separation between all entities in the structure through the following practices:

• Separate bank accounts for each entity with no commingling of funds
• Separate governance records for each entity, reflecting decisions made in the appropriate capacity for each entity
• Intercompany financial flows documented and categorized correctly in each entity’s records
• Contracts entered in the legal name of the appropriate entity for each activity
• Annual governance review for each entity confirming that governing documents remain accurate and governance practices remain consistent
• Succession mechanisms documented for each entity’s governance roles

When to Add or Consolidate Layers

Review the entity structure for potential additions or consolidations at each of the following trigger events:

• A new business activity is added with a materially different risk profile from existing activities
• A new category of valuable assets is acquired that warrants dedicated holding entity treatment
• The business expands into a new jurisdiction that warrants its own entity
• An existing entity’s activity scope changes materially, altering its risk profile
• The administrative burden of maintaining existing entities exceeds the protection value they provide
• A governance review identifies that an existing entity’s separation is not being maintained consistently

Every structural decision to add or consolidate entities should be driven by a specific protection or operational purpose, evaluated against the administrative requirements of maintaining the resulting structure.

Activity separation done correctly turns a single undifferentiated pool of liability exposure into a set of bounded, contained risks. That transformation is the practical definition of structural protection.

The information in this article reflects general structural principles and practical observations from consulting experience and is provided for educational purposes only. It should not be interpreted as individualized legal or tax advice.

Michael Ioane | MichaelIoane.com