Newsroom - June 2008
For over a year, the tax team has been working with a commercial construction client (which was originally incorporated by the Firm in 1981) to find a way to transition ownership from the original shareholders to the younger management team. The client specializes in office interiors, with revenues of approximately $100,000,000 per year.
The Company originally was a C Corporation but, in 1986, converted to an S corporation and continues to be an S corporation. S corporations, while permitting a flow–through of tax consequences, have numerous operational tax drawbacks (one class of stock, all dividends must be equal, no preferred returns, etc.). Consequently, we used a relatively new structure involving the creation of an LLC, as follows:
- The client created a new LLC and transferred all of its assets and liabilities to the LLC. The new LLC continued the business of the client.
- The management team then contributed cash to the LLC for a 25% interest./li>
- Over time, the client will receive preferred distributions (which are permitted in an LLC but not in an S corporation) and its percentage ownership will be reduced as the preferred distributions are paid./li>
It is anticipated that, after 4 or 5 years, the client's ownership interest will be reduced to zero and the new LLC will be owned entirely by the management team.