The Basics of Special Purpose Vehicles
- Specific Mission or Objectives
- Isolating Financial Risk
- Limitations on Organizational Structure
- Scholarship and Grant Programs
- Potential for Off-Sheet Reporting
A special purpose entity (SPE) or vehicle is a unique type of structure that can be established as a subsidiary of a company or non-profit organization. These entities have limited functionality and scope, but play a pivotal role in facilitating both business operations and charitable outreach. Many schools accept and manage scholarships through an SPE program to secure funding for students actively benefiting from grants. While there are many obvious benefits to the proper use of these entities, they can also be used to hide financial information and potentially mislead corporate investors.
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1. Specific Mission or Objectives
Almost all organizations operate under a mission and vision statement, but SPEs are even more specific than that. They typically have a single purpose, like holding all of a company’s real estate properties, or only exist temporarily to further a current objective. These purposes should be defined in the charter and founding documents as required by applicable state law.
2. Isolating Financial Risk
The primary function of special purpose vehicles is to isolate risk from and to the parent organization. These structures are subsidiaries of another entity, but their liability is separate from that of their owner. This means that the SPE’s assets are secure from the owning company’s liability, and the owner isn’t at risk for the subsidiary’s liability. Isolating finances in this way allows companies to engage in risk without jeopardizing all of the main company’s assets.
3. Limitations on Organizational Structure
In the United States, special purpose entities are organized depending on their specific needs and objectives. They typically form as a limited liability company, corporation or limited partnership by filing the appropriate articles of formation with a state government. The exact requirements regarding the application process and eligibility may vary across state lines.
4. Scholarship and Grant Programs
Some states, like Pennsylvania, offer Educational Improvement Tax Credit (EITC) through a special purpose entity program that incentivize contributions towards student grants and scholarships. Schools accepting scholarships use SPEs to secure these funds in a separate accounting structure from the primary organization to ensure they reach the recipient. This makes the scholarship process more stable for beneficiaries, allowing them to focus on their education rather than the reliability of the financing.
5. Potential for Off-Sheet Reporting
One of the most important facts to know about special purpose vehicles is their potential for misuse. SPEs received attention from the media and the public over the last few decades thanks to several major incidents in corporate financing, including the collapse of Enron, according to Forbes. Organizations interested in establishing special purpose structures should carefully consider operational, management and accounting procedures to limit the potential for corruption.
There are many things that are special about SPEs, especially when it comes to limiting risk or protecting dedicated assets. Many students throughout the country also benefit from a special purpose entity program established through individual schools or in partnership with local governments.
