This document discusses various issues related to choosing an appropriate business entity. It begins with revisiting basic choice of entity considerations and provides several case studies examining different business scenarios. It then covers some unusual issues that can impact choice of entity, such as capital requirements, IRC Section 1202 relating to qualified small business stock, and ESOP plans under IRC Section 1042. Alternative entities like captive insurance companies, IC-DISCs, and cooperatives are also mentioned. The document uses diagrams to illustrate the lifecycle of a family business enterprise and how the appropriate entity may change over time. It also examines unusual financing considerations and tax provisions that can drive the choice of entity.
Session on Impact Models, Business Models for Impact and Impact Measurement / Metrics design. Jakarta 2012. Features some sophisticated tools for social innovation.
Global Say on Pay: Coming to Your Stock Plan in 2013fwhittlesey
While say-on-pay is typically discussed as an executive compensation topic, many investorsâ and proxy advisersâ concerns are centered on equity compensation â and not just for executives. . The say-on-pay process is drawing more attention to equity compensation proposals, and the viability of your current equity plan may be at risk.
InKnowVision November 2012 Case Study - Basic Family Wealth Goal AchieverInKnowVision
Tom is 83 and Jane is 76. They have two children who are both well employed and live productive and happy lives. Tom was an attorney who headed a large patent firm in Washington DC. Jane served as an expert in international trade for much of her professional life. During the latter part of his career, Tom agreed to do work for a start up company that became very successful. Today, Tom’s share of the company is valued at $3.2M but generates $1.4M-$1.5M per year in taxable distributions. Several years ago, the company spun out one of its divisions and took the new company public. It has seen massive growth; almost no dividends have been distributed, and the company has a value to Tom today of approximately $6.4M. Tom and Jane also have approximately $5.2M in cash, $3.2M in retirement funds, and real estate of $4M for a total net worth of about $22M.
The primary planning goals are to:
Make sure that they have sufficient funds to live on for the rest of their lives
Maximize what they leave to their children and grandchildren
Increase the amount of charitable giving that they are currently doing
Equalize the financial positions of their son and daughter
Make a substantial provision for charity in place of estate tax if possible
Session on Impact Models, Business Models for Impact and Impact Measurement / Metrics design. Jakarta 2012. Features some sophisticated tools for social innovation.
Global Say on Pay: Coming to Your Stock Plan in 2013fwhittlesey
While say-on-pay is typically discussed as an executive compensation topic, many investorsâ and proxy advisersâ concerns are centered on equity compensation â and not just for executives. . The say-on-pay process is drawing more attention to equity compensation proposals, and the viability of your current equity plan may be at risk.
InKnowVision November 2012 Case Study - Basic Family Wealth Goal AchieverInKnowVision
Tom is 83 and Jane is 76. They have two children who are both well employed and live productive and happy lives. Tom was an attorney who headed a large patent firm in Washington DC. Jane served as an expert in international trade for much of her professional life. During the latter part of his career, Tom agreed to do work for a start up company that became very successful. Today, Tom’s share of the company is valued at $3.2M but generates $1.4M-$1.5M per year in taxable distributions. Several years ago, the company spun out one of its divisions and took the new company public. It has seen massive growth; almost no dividends have been distributed, and the company has a value to Tom today of approximately $6.4M. Tom and Jane also have approximately $5.2M in cash, $3.2M in retirement funds, and real estate of $4M for a total net worth of about $22M.
The primary planning goals are to:
Make sure that they have sufficient funds to live on for the rest of their lives
Maximize what they leave to their children and grandchildren
Increase the amount of charitable giving that they are currently doing
Equalize the financial positions of their son and daughter
Make a substantial provision for charity in place of estate tax if possible
Taylor Family Wealth Goal Achiever - InKnowVision Advanced Estate PlanningInKnowVision
The Family Wealth Goal Achiever™ is a plan design book (like a blueprint) that explains in easy to understand text and graphics the planning ideas being recommended by the planning team. It solves for high net worth tax planning, advanced estate planning, business transition planning, asset protection planning.
Learn more at www.inknowvision.com
Myer Family Wealth Goal Achiever - InKnowVision Advanced Estate PlanningInKnowVision
James is 64, and a few years ago started up a Consulting Company (Consulting Corp) with his business partner Dave. They have acquired some lucrative contracts over the last couple of years, and after spending frugally his entire life, James is starting to enjoy his newly created wealth. James is divorced and makes alimony payments in the amount of $100,000/yr. on top of his $500,000/yr. in living expenses. Because the wealth and income generated by the company is recent, James has not accumulated much in the way of liquid assets yet, but the company value is significant and future profits look very promising.
The primary planning goals are to:
Make sure that he has sufficient funds to live on for the rest of his life (approx. $600,000/yr., including alimony, after taxes and gifts).
Reduce income taxes.
Maximize the inheritance that he leaves to his children and grandchildren. Consider passing his business interests to his children involved in the industry while providing an equal inheritance of non-business interests to those that are uninterested.
Assure that he has sufficient liquid assets available at his death to eliminate the forced liquidation of his business assets.
Eliminate or reduce estate taxes.
Myer Family Wealth Goal Achiever- InKnowVision Advanced Estate PlanningInKnowVision
James is 64, and a few years ago started up a Consulting Company (Consulting Corp) with his business partner Dave. They have acquired some lucrative contracts over the last couple of years, and after spending frugally his entire life, James is starting to enjoy his newly created wealth. James is divorced and makes alimony payments in the amount of $100,000/yr. on top of his $500,000/yr. in living expenses. Because the wealth and income generated by the company is recent, James has not accumulated much in the way of liquid assets yet, but the company value is significant and future profits look very promising.
Learn more at www.inknowvision.com
Green construction jobs for youth, age 18-24, homeless housing, creative financing. This is a Social Enterprise Venture, combining free enterprise and social service,
Utilizing shared-equity solutions and Green renovation,
Primarily to create income and housing opportunities for individuals and families,
Who have heretofore been left out of the economic mainstream, and those losing their status,
as members of the Middle Class, through these rough economic times.
A presentation on how small businesses create wealth, how new forms of organisation emerging from the web are changing how we create organsiations, how collaboration linking people and knowledge creates value and finally how collaboration drives value creation and ultimately wealth.
Donfrio Family Wealth Goal Achiever- InKnowVision Advanced Estate PlanningInKnowVision
The Family Wealth Goal Achiever™ is a plan design book (like a blueprint) that explains in easy to understand text and graphics the planning ideas being recommended by the planning team. It solves for high net worth tax planning, advanced estate planning, business transition planning, asset protection planning.
Learn more at www.inknowvision.com
Taylor Family Wealth Goal Achiever - InKnowVision Advanced Estate PlanningInKnowVision
The Family Wealth Goal Achiever™ is a plan design book (like a blueprint) that explains in easy to understand text and graphics the planning ideas being recommended by the planning team. It solves for high net worth tax planning, advanced estate planning, business transition planning, asset protection planning.
Learn more at www.inknowvision.com
Myer Family Wealth Goal Achiever - InKnowVision Advanced Estate PlanningInKnowVision
James is 64, and a few years ago started up a Consulting Company (Consulting Corp) with his business partner Dave. They have acquired some lucrative contracts over the last couple of years, and after spending frugally his entire life, James is starting to enjoy his newly created wealth. James is divorced and makes alimony payments in the amount of $100,000/yr. on top of his $500,000/yr. in living expenses. Because the wealth and income generated by the company is recent, James has not accumulated much in the way of liquid assets yet, but the company value is significant and future profits look very promising.
The primary planning goals are to:
Make sure that he has sufficient funds to live on for the rest of his life (approx. $600,000/yr., including alimony, after taxes and gifts).
Reduce income taxes.
Maximize the inheritance that he leaves to his children and grandchildren. Consider passing his business interests to his children involved in the industry while providing an equal inheritance of non-business interests to those that are uninterested.
Assure that he has sufficient liquid assets available at his death to eliminate the forced liquidation of his business assets.
Eliminate or reduce estate taxes.
Myer Family Wealth Goal Achiever- InKnowVision Advanced Estate PlanningInKnowVision
James is 64, and a few years ago started up a Consulting Company (Consulting Corp) with his business partner Dave. They have acquired some lucrative contracts over the last couple of years, and after spending frugally his entire life, James is starting to enjoy his newly created wealth. James is divorced and makes alimony payments in the amount of $100,000/yr. on top of his $500,000/yr. in living expenses. Because the wealth and income generated by the company is recent, James has not accumulated much in the way of liquid assets yet, but the company value is significant and future profits look very promising.
Learn more at www.inknowvision.com
Green construction jobs for youth, age 18-24, homeless housing, creative financing. This is a Social Enterprise Venture, combining free enterprise and social service,
Utilizing shared-equity solutions and Green renovation,
Primarily to create income and housing opportunities for individuals and families,
Who have heretofore been left out of the economic mainstream, and those losing their status,
as members of the Middle Class, through these rough economic times.
A presentation on how small businesses create wealth, how new forms of organisation emerging from the web are changing how we create organsiations, how collaboration linking people and knowledge creates value and finally how collaboration drives value creation and ultimately wealth.
Donfrio Family Wealth Goal Achiever- InKnowVision Advanced Estate PlanningInKnowVision
The Family Wealth Goal Achiever™ is a plan design book (like a blueprint) that explains in easy to understand text and graphics the planning ideas being recommended by the planning team. It solves for high net worth tax planning, advanced estate planning, business transition planning, asset protection planning.
Learn more at www.inknowvision.com
Rob Siegel of X/Seed Capital Management at UCSC Baskin EngineeringMary Trigiani
Venture Capital and Universities -- a match made in ...
Robert E Siegel presents background and guidelines on venture capital investments for university-based startup founders.
Speaker Steve Croth of Better The World Inc. recounts his experiences in running a successful social venture. Get the firsthand story about the experience of starting up an innovative company.
Part of the MaRS CIBC Presents Entrepreneurship 101 lecture series:
http//www.marsdd.com/ent101
How has depreciation changed in your years of practice? Whether you have been in practice for 5 years or 40 years, the changes in the rules on depreciation have been staggering. Let’s walk down memory lane and see just where each of us gets lost in the Depreciation Maze.
6. Case Study #2
Don has an opportunity to open an new McDonald’s Franchise in
a rapidly growing area of DuPage County.
McDonald’s does not offer any tax advice to its franchisees.
McDonald’s tells him that they see franchisees operate in lots of
various forms, including Sole Proprietorships, Partnerships, LLCs,
C Corporations and S Corporation. It recommends that he consult
with his tax advisor, so he calls you.
Where do you start?
6
8. Case Study #3 – Real Estate Developer
Johnson (80 years of age) personally owns 40 acres of land the near
Western Suburbs (Cook/DuPage County). He wants to develop the
site with retail shopping, commercial office, townhomes &
condominiums.
He and his adult children have experience with building
condominiums, townhomes, and single family homes in the past. In
2004 they sold their former company for an amount in excess of
$200 million to a public company.
He mothballed the plans 5 years ago, but feels that the time is
rapidly approaching to re-launch this development.
8
9. Working Within the Entity Toolbox
Lifecycle of a Family Business Enterprise
Sole Proprietorship
Stage One
(Ground Floor)
Inception
9
10. Lifecycle of a Family Business Enterprise
Sole Proprietorship
Stage One
(Ground Floor)
Inception
General Partnership Limited Partnership
Stage Two
(addition owner added) (Passive Investor Added)
Adding other
people and/or
Raising Capital
Limited Partnership / LLC S Corporation C Corporation
(Debt or Private (Debt or Private (Debt or Private Placement,
Placement Capital) Placement Capital) and Venture Capital)
10
11. Lifecycle of a Family Business Enterprise
Sole Proprietorship
Stage One (Ground Floor)
Inception
General Partnership Limited Partnership
Stage Two
(addition owner added) (Passive Investor Added)
Adding other
people and/or
Raising Capital
Limited Partnership / LLC S Corporation C Corporation
(Debt or Private (Debt or Private (Debt or Private Placement,
Placement Capital) Placement Capital) and Venture Capital)
Stage Three LLC or General Partnership C Corporation S Corporation
Mature (Joint Venture) (Venture Capital or IPO) (Lower Income Tax
Business Access Cash Flow)
11
12. Lifecycle of a Family Business Enterprise
Sole Proprietorship
Stage One (Ground Floor)
Inception
General Partnership Limited Partnership
Stage Two
(addition owner added) (Passive Investor Added)
Adding other
people and/or
Raising Capital
Limited Partnership / LLC S Corporation C Corporation
(Debt or Private (Debt or Private (Debt or Private Placement,
Placement Capital) Placement Capital) and Venture Capital)
Stage Three LLC or General Partnership C Corporation S Corporation
Mature (Joint Venture) (Venture Capital or IPO) (Lower Income Tax
Business Access Cash Flow)
Stage Four Limited Partnership Limited Liability Company C and S Corporations, LLCs
Diversification/ (Real Estate related to (Non-family management (Multiple locations, products,
Adding Entities Family business) participation in real estate) services)
12
13. Lifecycle of a Family Business Enterprise
Stage One Sole Proprietorship
Inception (Ground Floor)
General Partnership Limited Partnership
Stage Two
(addition owner added) (Passive Investor Added)
Adding other
people and/or
Raising Capital
Limited Partnership / LLC S Corporation C Corporation
(Debt or Private (Debt or Private (Debt or Private Placement,
Placement Capital) Placement Capital) and Venture Capital)
Stage Three S Corporation
LLC or General Partnership C Corporation
Mature
(Joint Venture) (Venture Capital or IPO) (Lower Income Tax
Business Access Cash Flow)
Stage Four
Limited Partnership Limited Liability Company C and S Corporations, LLCs
Diversification/
(Real Estate related to (Non-family management (Multiple locations, products,
Adding Entities
Family business) participation in real estate) services)
S Corporation Family Limited Partnership Limited Liability Company
Stage Five
End Game Avoid Built In Gains Access Cash Flow Access Cash Flow
Access Cash Flow Transfer Value/Keep Control Transfer Value/Keep Control
13
15. Case Study #4
Beefco, Inc. is a food processor /distributor operating as an S
Corporation. They have revenue of over $500 million per year
in the sale of cut and pre-cook meat products to large fast food
franchise operations such as McDonalds, Subway & Applebys
throughout the Midwest.
They have been approached by their customers to establish
operations in North Carolina in order to provide product to
franchise operators in that area.
They may need a significant amount of capital and perhaps
some creative financing. How will the potential financing impact
the choice of entity? How might they restructure?
15
17. Section 1202
Revenue Reconciliation Act of 1993
Sec 1045 Rollover of gain in Qualified Small Business Stock
— 60 days reinvestment
50% exclusion for gains of Qualified Small Business Stock
— C Corporation
— Original Issue Stock after date of enactment
Alternative Minimum Tax Implications IRC Sec 57(a)(7)
— 7% included as a preference
— Effective tax rate at 14%
Creating Small Business Jobs Act of 2010
75% exclusion for stock acquired in 2009 and 2010
100% exclusion for stock acquired in 2011
Section 57(a)(7) would not apply in 2011
17
18. Employee Stock Ownership Plans
May only be established by Corporate Employer
S Corporation - ESOP permitted shareholder (―single‖ shareholder)
PSC ownership restricted to licensed profession = discrimination
Designed to Invest Primarily in Employer Securities
Ownership Substantially all Stock can be restricted
to employees and trust
Prevent competitors
Plan can contain ―Put Option‖ to require redemption
If Employer has a class of SEC Registered Securities, then the
ESOP must permit total participant voting of shares
Non-SEC voting only required for sale, reorganization, or liquidation,
dissolution or similar event
18
19. Traditional ESOP
Corporation
Newly Contribution in lieu of Cash
Issued as pension/profit sharing
stock contribution
ESOP TRUST/ Employee
Benefit Plan
19
20. Tax Benefits of ESOP
Enhanced deduction available
25% DC Limit
Plus interest necessary to service the ESOP debt
C Corporation may deduct ESOP portion of dividend
S Corporation ESOP not subject to UBIT on S income
Tax-deferred Rollover – Section 1042
Seller of C Corp Shares may rollover proceeds into tax-deferred
— Seller must have owned for 3 years
— ESOP must own 30% after transfer
— Proceeds must be invested in qualified securities (publicly traded)
Seller and Family may not be participants in the ESOP
Non-SEC voting only required for sale, reorganization, or liquidation,
dissolution or similar event
20
23. Understanding Domestic International Sales Corps
Brief history of IC-DISC
Requirements of an IC-DISC?
Benefits outside of the 15% dividend?
Categories of Gross Receipts
Identifying Qualified Export Receipts
How to calculate the Commission
23
24. A Brief History of IC-DISC
The IC-DISC first came about in 1984
I.R.C. Section 991 – 997.
Unlike other exporting incentives the IC-DISC has yet to be
challenged by the World Trade Organization (WTO).
Extraterritorial Income Exclusion repealed American Jobs
Creation Act of 2004
With the current low dividend rates the IC-DISC is now an
attractive tax saving vehicle.
24
25. Requirements for an IC-DISC?
A corporation formed by a U.S. exporter/shareholder and will qualify
as an IC-DISC if:
Organization Test
— Domestic Corporation
— Formed by U.S. exporter/shareholder
— The IC-DISC does not have more than one class of stock, which the
stock must have a par or stated value of at least $2,500 on each day
of its fiscal year.
— All shareholders consent to the election to be treated as an IC-DISC.
(See Form 4876-A)
— Must maintain its own set of books and records.
— Cannot be a member of a controlling group of which a Foreign Sales
Corporation is a member.
25
26. Not Required of a IC-DISC
It is a ―paper‖ entity. It is not required to have:
Office space
Employees, or
Tangible assets
How it works:
Exporting company forms a US corporation that elects to be an
IC-DISC by filing IRS Form 4876-A.
Exporting company pays commission to IC-DISC and deducts
the commission as an ordinary business deduction.
IC-DISC pays no tax on commission if two operational test met.
Shareholders are not taxed until earnings are distributed as
dividends.
— Deferred dividends reported on IRS Form 8404 and interest is paid.
26
27. Requirements for an IC-DISC?
Operational Tests
— 95% of its gross receipts are qualified exports receipts
– I.R.C. Sec. 993(a)(1).
— 95% of the adjusted basis of its assets on the last day of its taxable
year is qualified export assets (i.e., accounts receivable, temporary
investments, export property, and loans to producers).
– I.R.C. Sec. 993(b).
27
28. What are the Benefits?
Commissions paid by export Corporation to IC-DISC
Fully deductible at regular tax rate
Not treated as taxable income by IC-DISC
Taxable to Shareholders as a dividend when paid
— Plus low rate of interest
Deduct at 35% taxed at 15% (20% Savings)
Flexible ownership
Minors (dependents)
Parents (dependants)
Trusts, partnerships, corporation and foreign persons.
Roth IRA? (Deduct at 35% taxed at 0%)
28
29. Illustration
Restaurant Supply and
Distribution Company
(S Corporation)
100% Owner
Dividend Commission
IC-DISC
(Tax Exempt C Corporation)
29
31. Cooperatives
Two Types
Exempt cooperatives under IRC§ 501:
— § 501(c)(12) Cooperatives and Homeowners Associations
— § 501(c)(16) Cooperative Organizations to Finance Farms
— § 501(e) Cooperative Hospital Service Organizations
— § 501(f) Cooperative Service Organizations of Operating
Educational Organizations
— § 521 Farmers' Cooperative Associations
– Land O’ Lakes
Non-Exempt Cooperatives - Subchapter T of the IRC
— True Value Hardware
— Ace Hardware
31
32. Non-Exempt Cooperatives
A cooperative is a purchasing, marketing, or service enterprise
owned by and operated for the benefit of its patrons.
Co-ops are ―Hybrid‖ tax structures
Modified Conduit entities
Operate partially like C Corporations and partial like a trust
The taxable income of a cooperative is computed like a
corporation, except
Allowed to deduct amounts paid within eight and one-half months
after the end of the taxable year as patronage dividends
Patronage dividends
Paid in cash or in kind (―by certificate‖)
Dividends are included in the gross income in the year of receipt.
32
34. Captive Insurance Company
A captive insurance company ("Captive") is an insurance
company formed by a business owner to insure the risks of
related or affiliated businesses.
Business owner creates a Licensed Insurance Company
which offers to cover traditional risks
Property Insurance
Casualty Insurance
Captive can also cover non-traditional risks
• Business Interruption • Loss of Key customer or supplier
• Pollution • Loss of Tenant
• Regulatory Exposure • Loss of Key Employee
• Insurance Deductibles • Breach of Contract
• Exclusions and Gaps • Natural Disasters, Terrorism
34
35. Captive Insurance Company
Business Reasons for creating a captive
Lower insurance costs
— Share in benefit of low claims
— Charge a premium that reflects loss experience
Cash Flow
— Invest premium dollars and use investment income to reduce
costs
Risk Retention
— Managing risk results in greater profit to owned captive
Access Reinsurance market
— Reinsurance is international wholesale market
— Lower cost structure = lower cost
Tax Minimization and deferral
— Self Insurance is not deductible – premiums paid to a captive are!
35
36. Tax Benefits of Captive Insurance Companies
Subchapter L requires Insurance Companies to be C
Corporations
Section 831(b) exempts first $1.2 million of premium from
income tax
Premiums in excess of $1.2 million can be sheltered by loss
reserves
Insurance companies operate as C Corporations
Insurance companies can deduct ―reserves‖
36
37. IRS Required Elements for Insurance Companies
A Captive must provide
Risk Shifting and
Risk Distribution
“Risk Shifting” is the actual transfer of Risk from the insured
to the Captive Insurance Company
“Risk Distribution” is the Captives exposure to adequate third-
party risk to obtain the risk-pooling effect had by traditional
insurance companies.
Reduce the possibility that a single claim will exceed premiums
received.
Generally, 12 insured's are sufficient (even if subsidiaries, so
long as they are not disregarded entities)
37
38. Illustration
Family Owed Captive
Client
(Grantor)
Irrevocable Trust for benefit
of Client’s Family
100% Owner
Restaurant A
100% Owner S Corporation
Captive Insurance Company
C Corporation Restaurant B
S Corporation
38