The design of an entity (its legal structure, capital structure, type(s) in interest(s) issued and the nature of its activities) is a core concept of the VIE model. This concept is evident in many places, including the conditions for qualifying for the business scope exception. If the company participated significantly in the legal entity’s design, or redesign, then the business scope exception is not available. There are two exceptions to this general rule (the “operating joint venture” exception and the “franchisee” exception) which will be addressed in subsequent questions.
- Whether the company, which includes its related parties and de facto agents, participated significantly in the design, or redesign, of the entity is a facts and circumstances evaluation. Some good indicators that there significant participation include:
- The company obtained its interest in the legal entity at the time of its formation or shortly thereafter;
- The company’s signature, or that of a related party or de facto agent, appears on the formation and governing documents of the legal entity;
- The legal entity was originally formed as a wholly-owned or majority-owned subsidiary of the company.