1. Minimizing Risk Through Company Restructuring
Garth D. Stevens, Snell & Wilmer L.L.P. Joshua P. Hayes, Eide Bailly LLP

2. Objectives of Reorganization
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.

3. Limited Liability and Piercing the Corporate Veil

4. 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.

5. 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.

6. Simple Company Structure
Shareholders
Company
—High risk operations
—Low risk operations
—IP assets
—Owned real estate
©2010 Snell & Wilmer L.L.P.

7. Common Firewall Structure
Shareholders
HoldCo
OpCo. #1
OpCo. #2
IPCo.
Real Estate Co.
©2010 Snell & Wilmer L.L.P.

8. 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.

9. 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.

10. 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.

11. Step One – Formation of New Parent Holding Company
How Do We Get There?
Step One – Formation of New Parent Holding Company
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.

12. Step Two – Formation of New Subsidiaries
How Do We Get There?
Step Two – Formation of New Subsidiaries
Shareholders
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.
IPCo.
Real Estate
Co.
©2010 Snell & Wilmer L.L.P.

13. Step Three – Transfer of Assets
How Do We Get There?
Step Three – Transfer of Assets
Shareholders
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.
HoldCo.
OpCo.
IPCo.
Real Estate
Co.
ASSETS
©2010 Snell & Wilmer L.L.P.

14. Admin Services Agreements
The End Result
Shareholders
HoldCo
OpCo. #1
OpCo. #2
IPCo.
Real Estate Co.
Admin Services Agreements
IP Licenses
Building Lease
©2010 Snell & Wilmer L.L.P.

15. Subsidiaries vs. Sister Companies
Parent Co.
OpCo.
IPCo.
Real Estate Co.
HoldCo
OpCo.
IPCo.
Real Estate Co.
©2010 Snell & Wilmer L.L.P.

16. Subsidiaries vs. Sister Companies
Tax Filing Considerations:
Consolidated tax election?
Combined filing?
©2010 Snell & Wilmer L.L.P.

17. Preserving Limited Liability
TWO KEYS:
Maintenance of independent existence and operation.
REASONABLE capitalization and/or insurance for each company.
©2010 Snell & Wilmer L.L.P.

18. 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.

19. Maintaining The Firewalls
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, interest-bearing 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.

20. 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.

21. 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.

22. 7 Tax Mistakes that will cost you
Owner compensation strategies
Reasonable compensation for services
C-corp vs. S-Corp vs. LLC
Hire your Children?
Must be real work performed or services performed
College planning with low tax cost and potential credits
©2010 Snell & Wilmer L.L.P.

23. 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.

24. 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.

25. Thank You Garth Stevens Snell & Wilmer 602-382-6313 gstevens@swlaw.com
Joshua P. Hayes Eide Bailly LLP