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Minimizing Risk Through Company RestructuringGarth D. Stevens, Snell & Wilmer L.L.P. Joshua P. Hayes, Eide Bailly LLP
Objectives of ReorganizationProtect 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.
Limited Liability and Piercing the Corporate Veil
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.
Piercing the Corporate VeilPotential 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.
Simple Company StructureShareholders Company —High risk operations —Low risk operations —IP assets —Owned real estate ©2010 Snell & Wilmer L.L.P.
Common Firewall StructureShareholders HoldCo OpCo. #1 OpCo. #2 IPCo. Real Estate Co. ©2010 Snell & Wilmer L.L.P.
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.
Factual Analysis & Planning; Preliminary StepsDetermine 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.
Tax Analysis and ConsiderationsTax 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.
Step One – Formation of New Parent Holding CompanyHow 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.
Step Two – Formation of New SubsidiariesHow 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.
Step Three – Transfer of AssetsHow 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.
Admin Services AgreementsThe 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.
Subsidiaries vs. Sister CompaniesParent Co. OpCo. IPCo. Real Estate Co. HoldCo OpCo. IPCo. Real Estate Co. ©2010 Snell & Wilmer L.L.P.
Subsidiaries vs. Sister CompaniesTax Filing Considerations: Consolidated tax election? Combined filing? ©2010 Snell & Wilmer L.L.P.
Preserving Limited LiabilityTWO KEYS: Maintenance of independent existence and operation. REASONABLE capitalization and/or insurance for each company. ©2010 Snell & Wilmer L.L.P.
Independent ExistenceThink 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.
Maintaining The FirewallsAvoid 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.
Capitalization and InsuranceThe 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.
7 Tax Mistakes that will cost youPayroll 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.
7 Tax Mistakes that will cost youOwner 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.
7 Tax Mistakes that will cost youKeeping 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.
7 Tax Mistakes that will cost youEmbezzlement 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.
Thank You Garth Stevens Snell & Wilmer 602-382-6313 email@example.comJoshua P. Hayes Eide Bailly LLP
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