How to Restructure Your Company for Success

To: The organizers 

From: Tax advisor 

Date: 16/11/2018 

Subject: Recommendation for Restructuring 

Executive summary 

Over the years since the start of business operation by Tai-Ga, the business has been a success. The attaining of David Duncan's projections is one of the achievements in the organization. Tai-Ga company is now worth 100 million dollars. The progress that can be seen in the business so far is because the business set different targets and each stakeholder in the organization worked towards that target. In light of the prevailing situation, it is unavoidable that some restructuring will have to be done in the company for the benefit of all the members and to ensure the longevity of the company. This restructuring will factor in the federal and state tax regulations, the interests of the company owners, and the contributions of the proposed interested shareholders. If the process of tax-free is activated when a business restructuring is about to happen, shareholders might not pay any tax cost immediately. Tax-free activation aims to minimize or defer the tax payment to another time after the whole restructuring process is over. The recommendations herein aim at minimizing the tax costs to the entity and the individual shareholders, while enhancing the company’s capital structure. 

For maximum tax benefits and capital gains, I recommend that the company will operate as C-Corporation entity. Acquisition of Acme will mean that the company will have both individuals and an organization as shareholders. As a C-Corporation, the company will have certain advantages like being able to trade in more than one class of stock. C-Corporations are not pass through entities and therefore, the shareholders will not be personally liable for the debts or loses of the company. However, the individual shareholders will pay taxes on their dividends after the net profit has been distributed among them. 

Andy is set to leave the company due to illness and will be forced to relinquish his stock. His options are: 

Seek equity compensation for his stock. 

Transfer his stock to his wife (or next of kin). 

Sell his shares privately to an interested prospective buyer. 

I would recommend that Andy seek equity compensation for his shares. Hereafter, they will sign a separation agreement form after which Andy’s name will be removed from Tai-Ga’s documents. This will allow the members to have full control of the company stock and thereby decide on their next course of action. Also, by claiming equity compensation, Andy will cover personal liability for the income tax of the unpaid due period ( McCahery, Sautner, & Starks, 2016). 

Following Andy’s departure, the company may decide to issue out new stock or sell Andy’s stock to two interested buyers, i.e. Brian Bolton and Acme Manufacturing. Given the longstanding business relationship between the company and the two buyers, it is prudent that Tai-Ga sells out shares to them. The company may then decide to sell out the remaining stock to other promising buyers. I recommend that the company strives to retain full shareholder ownership through the redistribution of the stock, rather than trading company bonds. 

After the restructuring and reissuing of the stock, all the company stock will be owned by the shareholders. This will mean that the company will have more equity than debt, and shareholders will be in complete ownership of the company (McCahery, Sautner, & Starks, 2016). Almost the entire financing is derived from stock and company revenues. The low debt to equity ration means that the capital structure of the company is conservative (Krämer, 2015). 

According to the Internal Revenue Code, (Code Sec. 15) under the Tax Cut and Jobs Act of 2017, the corporate tax rate for C-Corporation is 21. The corporation is however taxed separately from the shareholders, after which the profits distributed to the shareholders are then taxed at an individual level (Schlagenhauf, 2018). This creates double taxation for the entity and its shareholders. The shareholders will then be taxed based on their personal income. The personal income tax rates in the state range from 1.7% to 4.9% (Buenker, 2018).  

Tax Costs of Individuals and the Entity 

Tai-Ga = 21% of 10,000,000 

= $2,1000,000 

Carrie: 50% of $10,000, 000 = $5,000,000 

Tax: (4.9% of $,5,000,000) + $768 = $245,768 

Dave: 20% of $10,000,000 = $2,000,000 

Tax: (4.9% of $2,000,000) + $504.50 = $98,504.5 

Naomi: 5% of $10,000,000 = $500,000 

Tax: (4.9% of $500,000) + $504.50 = $25,004.5 

Acme: 10% of $10,000,000 = $1,000,000 

Tax: (4.9% of $1,000,000) + $504.50 = $49,504. 

Brian: 2% of $10,000,000 = $20,000 

Tax: (4.9% of $20,000) + $504.50 = $1,484.5 

Andy: Capital gains tax as a result of disposal of shares 

Gain = (25% of $10,000,000)  - $500,000 = $2,000, 000 

Tax = 4.9% of $,2,000,000) + $768 = $98,768 

Tax Benefits for Individuals and the Entity 

The company will enjoy a tax benefit by being exempted from income tax taxation. The individual shareholders will enjoy a tax benefit for social security which is partially taxed in New Mexico. 

Other tax benefits will include increasing the shareholder allowances and insurance benefits. 

A well-designed business structure will give benefits to an organization through tax savings during the restructuring period. During the restructuring period, stakes of shareholders in a firm are not likely to be affected in any way since restructuring happens once in a while. When writing the financial statement of a firm, they include the restructuring expense. The restructuring costs will, in turn, affect the income statement of the firm significantly. The restructuring process is beneficial to the organization because it can help it get to identify any opening for tax planning. The reorganization procedure can also make your business transparent which is a way of showing the public and the investors how committed you are with the firm. 

In conclusion, restructuring is an essential aspect of an organization. In as much as during the early periods of doing redesign a lot of costs and expenses might incur, but it will prove fruitful in the long run. 

Thank you, 

Tax advisor 

References  

Buenker, J. D. (2018).  The Income Tax and the Progressive Era . Routledge. 

Chen, D., Qi, S., & Schlagenhauf, D. (2018). Corporate income tax, legal form of organization, and employment.  American Economic Journal: Macroeconomics ,  10 (4), 270-304. 

Krämer, R. (2015). Taxation and capital structure choice: The role of ownership.  The Scandinavian Journal of Economics ,  117 (3), 957-982. 

McCahery, J. A., Sautner, Z., & Starks, L. T. (2016). Behind the scenes: The corporate governance preferences of institutional investors.  The Journal of Finance ,  71 (6), 2905-2932. 

Schlagenhauf, D. (2018). Corporate Income Tax, Legal Form of Organization, and Employment. In  2018 Meeting Papers (No. 334). Society for Economic Dynamics. 

Yagan, D. (2015). Capital tax reform and the real economy: The effects of the 2003 dividend tax cut.  American Economic Review ,  105 (12), 3531-63.