3-18
Problem 3-A: Lucy Catering
Driving factors for Lucy:
•
Earnings bailout - no double income taxes and no or low
self-employment taxes
•
Separate tax entity - single owner LLC would be
disregarded entity
•
Passive income potential for Lucy, possibly sheltered by
passive losses from other ventures
•
Limited liability - trucks on road and 10 employees
•
No need for owner/employee fringe benefits
Recommendation: S Corp
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com
3-19
Problem 3-B: Management Consulting Firm
Driving factors for Sam, Larry, and Joe:
•
Fringe benefits for themselves
•
Earnings all bailed as compensation income
•
Limited liability from negligence of other owners and
employees
•
Business service income vehicle - not likely sale candidate
Recommendation: C Corp
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com
3-20
Problem 3-C: Roger Specialized Shop
Driving factors for Roger:
•
Maximum control (Board control) - no hassles from
minority owners
•
Income bailout to minority owners - no double income
taxes or self-employment taxes
•
Protected compensation contract and bonus program
•
Limited liability - machines, employees and contracts
•
Passive income to minority owners
Recommendation: S Corp
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com
3-21
Problem 3-D: Roger Revised Plan
Driving factors for Roger:
•
Losses passed through to investors
•
Beat basis and at-risk hurdles for investors
•
Maximum control - no hassles from minority owners
•
Income bailout to minority owners when turn profitable no double income taxes or self-employment taxes,
preferably passive income
•
Protected compensation contract and bonus program
•
Limited liability - machines, employees and contracts
Recommendation: LLC or Limited Partnership with Rogerowned S Corp general partner
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com
3-22
Problem 3-E: Rhonda Flash Application
Driving factor for Ronda: Ability to attract venture capital
Recommendation: C Corp
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com
3-23
The 1561 Trap
The 1561 Trap - No multiple C Corp benefits to group
•
Only one Section 11 bracket racket
•
Only one 250k accumulated earnings tax credit
•
Only one 40k corporate AMTI exemption
•
Only one $2 million Section 59 tax exemption
Big Issue: What is controlled group? Three types
•
Parent-Subsidiary controlled group
•
Brother-Sister controlled group
•
Combined controlled group
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com
3-24
Parent- Sub Controlled Group
Parent
C Corp
80% +
Sub 1
C Corp
80% +
Sub 3
C Corp
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com
80% +
Sub 2
C Corp
80% +
Sub 4
C Corp
- 80% of voting or total share
value of each corp owned by
other corps in group, and
- 80% of voting or total share
value of at least one corp
owned by a common parent
corp.
3-25
Brother- Sister Controlled Group
5 or Fewer
Persons
50% +
Brother
C Corp
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com
- 5 or fewer individuals,
estates, or trusts
50% +
Sister
C Corp
- Own 50% of voting or
total share value of both
- Consider only minimum
common ownership in each
entity
3-26
Combined Controlled Group
5 or Fewer
Persons
50% +
Brother
C Corp
80% +
Sub 1
C Corp
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com
50% +
Sister
C Corp
80% +
Sub 2
C Corp
- 3 or more corps part of
parent-sub or brother-sister
controlled group, and
- At least one corp both a
common parent of parentsub group and a member of
brother-sister group
3-27
Controlled Group Attribution (1563)
•
Options - Deemed exercised
•
5% partners - proportional interests
•
5% trust and estate beneficiaries
•
5% corporate shareholder - proportional interests
•
Spouse
•
Minor children (under age 21), but not adult children
unless
•
If person owns more than 50%, considered owner of
stock owned by parents, grandparents, grandchildren
and children over age 21
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com
3-28
Problem 3-F: Three C Corp Plan
Stock Ownership
Minimum Common Ownership
X Corp
Y Corp
Z Corp
Jim
10%
40%
30%
10%
10%
30%
Linda
80%
5%
25%
5%
25%
5%
Sam
10%
55%
45%
10%
10%
45%
100%
100%
100%
Totals
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com
X-Y
X-Z
25%
45%
X and Y
Not Brother-Sister
X and Z
Not Brother-Sister
Y and Z
Brother-Sister
Y-Z
80%
3-29
Problem 3-G: Medical Supply JV
Key factors for ABC Inc. and Smith Enterprises:
• Move funds with no tax impact (pass thru entity)
•
Flexibility with income and cash distributions
•
Contract control provisions that protect both
• Limited liability - separate employees
•
S Corp not option - ineligible shareholders
Recommendation: LLC
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com
3-30
Problem 3-H: Jones 482 Trap
Jones
C Corp
Bargain Sale
Imputed Income
Newco
C Corp
Imputed
Contribution
Imputed Dividend
Individual
Shareholders
Income imputed at both corporate and shareholder levels
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com
3-31
Problem 3-H: Jones Industries
Key factors for Jones Industries:
•
Avoid 482 trap risks
•
Separate offshore buying entity
•
Common control
•
No tax hassles on dealings between entities
•
Pricing flexibility between entities
Recommendation: Consolidated Group with
C Corp Holding Company Parent
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com
3-32
Problem 3-I: Jerry Yacht Company
Key factors for Jerry:
•
Preferred cash flow to investors
• Special and different profit and loss allocations
(30%-70% profits and 99%-1% losses)
•
Jerry in complete control
•
No double tax or self-employment tax hassles
•
Pass thru of profits and losses
• Limited liability - yacht building and sales
Recommendation: LP with S Corp General or LLC
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com
3-33
Problem 3-J: Golfer Grow and Sell Company
Key factors for five Golfer owners:
•
Basis build-up on income accumulations
•
No double tax on sell-out
• Tax-free corporate reorg potential
•
No ordinary income on entity ownership sale
•
Limited liability exposure
• Equal control
Recommendation: S Corp
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com
3-34
Problem 3-K: Wharton Subs
Key factors for Wharton Enterprises
• Multiple separate entities
• Wharton parent owner of all entities
•
Consolidated operations for tax purposes
•
Preserve pass thru benefits
•
Minimize or eliminate conversion hassles
Recommendation: Maintain existing S Corp
with new corporations being Qualified
Subchapter S Subs under 1361(a)(3)
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com