What's the primary job of every entrepreneur? Take profitable risks, do everything legitimate to at least preserve capital when profit can't be made.
This job wouldn't be done when a business survives the volatile early stage, breaks even, enjoys profitability for few years and then goes bankrupt as a result of venturing into risky ventures. The going concern concept would be defeated.
So, what long term business survival options do some entrepreneurs pick to preserve their assets when they go into volatile ventures? One of them is the Special Purpose Vehicle (SPV) also known as Spechial Vehicle Entity (SPE).
A special purpose vehicle or special purpose entity is defined as a subsidiary created by a parent company for a special purpose.
The special purpose most often, is to isolate a parent company from financial risk by providing securitization of assets
The above is made possible by the fact that SPV has Its legal status as a separate company. This status makes its obligations to secure its assets in the eventuality of the parent company going bankrupt possible. This is why SPV is sometimes called a bankruptcy-remote entity.
As a subsidiary with a legal entity status, a SPV has its own distinct balance sheet ( a picture of its assets, liabilities and capital) that's often off the balance sheet of the parent company. This is where investors have a problem with SPV, as it could be exploited to hide losses
However, some businesses create SPV for one purpose, to aecuritize debt and give investors the assurance of repayment. And not always to commit financial fraud
