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Business reorganization project - by Jon Andrews, CPA, P.C.

ABC Corp. was established in 1979 as a C corporation manufacturing and selling oilfield products. Initially, it plodded along making $700K - $800K in annual sales, with about a 30% gross margin, and overhead that was roughly equivalent to the gross profit so that it did not have any significant net profits.

From 1995 to 2002, the company grew to $5,000,000 in annual sales, with a 60% gross margin, and overhead that consistently left a 20% bottom line. This company had one shareholder and no debt. Over the same time period, the company matured significantly so that by 2002, the growth curve had leveled out and the company consistently generated substantial cash flow on a monthly basis. While this represents an enviable situation, it also presented the company and sole shareholder with several problem areas - double taxation on corporate profits, inability to continually withdraw the cash, potential for accumulated earnings issues, estate issues, Texas franchise tax issues, and more.

To help resolve those problems, we did a complete reorganization of the business structure. Below is an outline of the process:

  • Establish a limited liability company (LLC1) with the sole shareholder (SH) of the company being the sole member of LLC1
  • Create a limited partnership (LP1) with LLC1 as the general partner and SH as the limited partner
  • SH contributes assets, including his stock in ABC, to LP1 in exchange for his limited partner interest
  • Establish a limited liability company (LLC2) with SH being the sole member
  • Liquidate ABC with LP1 receiving all of the assets and liabilities in exchange for all of its stock
  • Create a limited partnership (LP2) with LLC2 being the general partner and LP1 being the limited partner
  • LP1 contributes certain assets and liabilities to LP2 in exchange for its limited partner interest
  • LP2 operates the business that was formerly ABC Corp.
  • LP1 owns most of the assets previously owned by SH, certain assets previously owned by ABC, and the limited partner interest in LP2
  • After completing the above, the cash flow created by the business can be freely distributed as desired with no double taxation, SH has the ability to structure his estate, SH has better ability to ensure continuity of management for the business, the business is no longer subject to the Texas franchise tax, and there are no worries about accumulated earnings tax.

    As a result of this project, the company and shareholder have greater profitability, greater flexibility, and a lesser overall tax burden.

    If you feel like you and your business could benefit from a review of your organization, please click here to download our initial questionnaire. After it is completed, email it to us for a detailed proposal customized to your needs.

    The example projects discussed in this site are actual projects that have been completed. The client names have been deleted to protect their privacy. We would be happy to discuss how these, or other ideas, apply to your specific situation.

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