Minimizing Risk Through
Company Restructuring
Garth D. Stevens, Snell & Wilmer L.L.P.
Joshua P. Hayes, Eide Bailly LLP
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Objectives of Reorganization
1.
2.
3.
Protect specific classes of assets (e.g.,
real estate, IP)
Create firewalls between different
businesses
Insulate higher risk business from lower
risk business
©2010 Snell & Wilmer L.L.P.
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Limited Liability and Piercing the
Corporate Veil
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Limited Liability
•
•
A fundamental tenet of corporation and
LLC formation:
Ordinarily, a company’s shareholders will
not be liable for the company’s debts or
other liabilities beyond the shareholders’
equity investment in the company.
©2010 Snell & Wilmer L.L.P.
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Piercing the Corporate Veil
Potential triggers:
◦
◦
◦
◦
Fraud
Deliberate efforts to hinder creditors
Recklessly undercapitalizing / underinsuring the
company.
Failing to observe legal formalities that give the
company independent legal status.
©2010 Snell & Wilmer L.L.P.
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Simple Company Structure
Shareholders
Company
—High risk operations
—Low risk operations
—IP assets
—Owned real estate
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Common Firewall Structure
Shareholders
HoldCo
OpCo. #1
OpCo. #2
IPCo.
Real Estate
Co.
©2010 Snell & Wilmer L.L.P.
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Three-Step Process
•
•
•
First – Factual analysis and planning;
preliminary steps.
Second – Complete the Reorganization
(one time event).
Third – Observe corporate & business
formalities (ongoing).
©2010 Snell & Wilmer L.L.P.
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Factual Analysis & Planning;
Preliminary Steps
•
•
•
•
•
Determine appropriate tax structure.
Identify contractual restrictions (e.g., bank loan
documents; shareholder agreements).
Identify permit and licensing issues, including
transferability.
Identify notices/registrations that will need to be
made (e.g., IP transfers; notices to customers).
Obtain applicable shareholder/director approvals.
©2010 Snell & Wilmer L.L.P.
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Tax Analysis and Considerations
•
•
•
•
Tax considerations – e.g., preservation of
NOLs and tax credits.
Valid business purpose.
Shareholders receive stock in exchange
for stock.
Investment position is equivalent after
transaction is complete.
©2010 Snell & Wilmer L.L.P.
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How Do We Get There?
Step One – Formation of New Parent Holding Company
1.
2.
3.
4.
Form new HoldCo.
Shareholders of current OpCo
assign their shares of OpCo to
new HoldCo (Code § 351)
In exchange, HoldCo issues
shares to OpCo shareholders
The result – Shareholders now
hold the same % ownership of
HoldCo and HoldCo owns OpCo
Shareholders
HoldCo
OpCo.
©2010 Snell & Wilmer L.L.P.
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How Do We Get There?
Step Two – Formation of New Subsidiaries
Shareholders
1.
2.
3.
HoldCo forms new OpCo
subsidiaries.
Each OpCo subsidiary
issues shares to HoldCo
S-election for new
HoldCo; Q-Sub elections
for subsidiaries (watch
timing)
HoldCo.
OpCo.
OpCo.
IPCo.
Real
Estate
Co.
©2010 Snell & Wilmer L.L.P.
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How Do We Get There?
Step Three – Transfer of Assets
1.
2.
3.
Original OpCo. makes a
dividend/distribution of
assets to HoldCo. (Code
§ 368)
HoldCo then contributes
the assets to another
OpCo subsidiary.
OpCo’s then enter into
cross agreements on
arm’s length terms.
Shareholders
HoldCo.
ASSETS
OpCo.
OpCo.
IPCo.
Real
Estate
Co.
©2010 Snell & Wilmer L.L.P.
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The End Result
Shareholders
Admin Services
Agreements
OpCo. #1
HoldCo
OpCo. #2
IPCo.
Real
Estate
Co.
IP Licenses
Building Lease
©2010 Snell & Wilmer L.L.P.
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Subsidiaries vs. Sister Companies
Parent Co.
HoldCo
OpCo.
IPCo.
Real Estate
Co.
OpCo.
IPCo.
Real
Estate
Co.
©2010 Snell & Wilmer L.L.P.
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Subsidiaries vs. Sister Companies
Tax Filing Considerations:
•
•
Consolidated tax election?
Combined filing?
©2010 Snell & Wilmer L.L.P.
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Preserving Limited Liability
TWO KEYS:
1.
Maintenance of independent existence
and operation.
2.
REASONABLE capitalization and/or
insurance for each company.
©2010 Snell & Wilmer L.L.P.
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Independent Existence
•
•
Think of (and treat) each company as if it
was truly independent of each other
company.
If you don’t treat each company as a
separate legal entity, there is a good
chance that a court won’t either.
©2010 Snell & Wilmer L.L.P.
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Maintaining The Firewalls
•
•
•
•
•
•
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Avoid co-mingling funds; each company with its own bank
account.
Document inter-company transactions with written
agreements on arm’s length terms.
Intercompany loans should be under written, interestbearing notes or loan agreements (not just GL entry).
Each company should follow proper corporate formalities.
Where appropriate, each company should have its own
employees.
If possible, avoid cross guaranties and cross-default terms
in contracts.
If possible, physical segregation of businesses.
©2010 Snell & Wilmer L.L.P.
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Capitalization and Insurance
•
•
The best way to avoid a creditor’s attempt to
“pierce the veil” is to give the creditor no need to
do so.
Take a REASONABLE approach to capitalizing
and/or insuring each company.
©2010 Snell & Wilmer L.L.P.
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7 Tax Mistakes that will cost you
•
Payroll Taxes
◦
◦
•
It’s a VERY easy and tempting loan to make
It isn’t the employer’s money, it is trust fund money on
behalf of employees.
Independent Contractors
◦
◦
Employees are expensive and healthcare reform is
complicated.
20 part test IRS uses to determine status of worker
©2010 Snell & Wilmer L.L.P.
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7 Tax Mistakes that will cost you
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Owner compensation strategies
◦
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Reasonable compensation for services
C-corp vs. S-Corp vs. LLC
Hire your Children?
◦
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◦
Reasonable compensation for services
Must be real work performed or services performed
College planning with low tax cost and potential
credits
©2010 Snell & Wilmer L.L.P.
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7 Tax Mistakes that will cost you
•
Keeping Receipts
◦
◦
•
Must keep an accurate diary or business log in
addition to receipts
Documentation of Who? Why? When? Where?
Purchasing equipment at the end of the
year
◦
◦
Mid quarter convention might limit deduction
Uncertainty of bonus depreciation and Sec. 179
©2010 Snell & Wilmer L.L.P.
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7 Tax Mistakes that will cost you
•
Embezzlement
◦
Separation of duties
-
◦
Ordering vs. receiving
Check writing/signing vs. A/P input
Monthly oversight by owner is a must!
©2010 Snell & Wilmer L.L.P.
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Thank You
Garth Stevens
Snell & Wilmer
Joshua P. Hayes
Eide Bailly LLP
602-382-6313
602.264.8663
gstevens@swlaw.com
jhayes@eidebailly.com
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