Next video:
Loading the player...

A special purpose entity, sometimes called a special purpose vehicle, is a legal entity created for one very limited, particular task. Typically, SPEs are subsidiaries of a larger corporation.

Usually the task of a special purpose entity is to isolate risk.  By setting up an SPE dedicated to the acquisition and financing of specific assets, the parent corporation is protected in case of bankruptcy, loan default or other loss on those assets. 

Another use for an SPE is managing a single asset that has exceptionally complex financial transactions and requires numerous permits for its operation, such as a factory or a power plant. By placing the asset in the SPE, it’s easier to keep track of income and expenses associated with this entity. Plus, if the owner wants to sell the asset, any required permits will transfer with the SPE, eliminating the need to assign them over separately. This greatly simplifies a potentially difficult sale.  

In the past, corporate managers have used special purpose entities to hide debt and thus make the company's financial statements look better.  This was particularly an issue in the Enron scandal of 2001. 

Still, special purpose entities have a legitimate purpose in helping companies isolate risk, which consequently creates options for companies to raise capital and structure debt in a more efficient way.  

Related Articles
  1. Small Business

    Why Enron Collapsed

    Enron’s collapse is a classic example of greed gone wrong.
  2. Investing

    Off-Balance-Sheet Entities: An Introduction

    The theory and practice of these entities varies greatly. Investors need to learn what they're getting into.
  3. Financial Advisor

    How to Protect Assets from Creditors and Lawsuits

    Proper planning is required to ensure that a client’s assets are truly protected. Here are some strategies that can help shield them from seizure.
  4. Investing

    Financial markets: Capital vs. Money Markets

    There are several key differences between capital markets and money markets as components of financial markets. Check out the similarities and differences between the two markets.
  5. Financial Advisor

    Benefits Abound for Active Traders Who Incorporate

    Trading through a separate business structure allows active traders access to all of the tax mitigation and asset protection strategies available.
  6. Trading

    Asset protection for the business owner

    Learn about common asset-protection structures and which vehicles might work best to protect particular types of assets.
  7. Financial Advisor

    Acquire a career in mergers

    This exciting sector demands a lot from its advisors. Are you up for it?
  8. Investing

    Mark-To-Market: Tool Or Trouble?

    Mark-to-market accounting can be a valuable practice, but all bets are off when the market fluctuates wildly.
  9. Insights

    Why Angry Birds Had to Change its Business Model

    Rovio Entertainment's Angry Bird franchise topped 37 markets and grossed a total of $43 million in its opening weekend.
  10. Insights

    Basic Concept Of Absolute Advantage

    Absolute advantage is the ability of an individual, country or company to produce a good or service at a lower cost than any competitor. An entity with an absolute advantage requires fewer inputs ...
Trading Center