ESOP POWER An Advanced Planning Strategy For For Private Corporations Presented by: ATI Capital...
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Transcript of ESOP POWER An Advanced Planning Strategy For For Private Corporations Presented by: ATI Capital...
ESOP POWERAn Advanced Planning Strategy
For
For Private CorporationsPresented by:
ATI Capital Group, Inc.
ATICG © 2002 ATI Capital Group, Inc. 2
What is an ESOP
• ESOP = Employee Stock Ownership Plan• An ESOP is a QUALIFIED PLAN under
the Employees’ Retirement Income Security Act of 1974 (ERISA)
• See Sections 401(a), 4975(e)(7), and 501(a) of the Internal Revenue Code of 1986, as amended, and Section 407(d)(6) of ERISA, 1974
ATICG © 2002 ATI Capital Group, Inc. 3
Unique Features of ESOT
An ESOP trust “ESOT” has three very unique features:
1. ESOT must own “principally” stock in its sponsor company.
2. An ESOT is the ONLY qualified plan under ERISA allowed to BORROW MONEY!!
3. The trust can purchase the Company in “Stages” (multiple transactions).
ATICG © 2002 ATI Capital Group, Inc. 4
Powerful Use #1: Exit Strategy
ESOP
$ Loan 2
Stock
$3
QRPsSec. 1042
QualifiedReplacementProperty= Stocks& Bonds
Div
’d $
$ 4
5
Collateral
No Tax onTransactionCompany
Deducts Princ.On Loan
Lender
The BasicTransaction
Corporation
1$ Loan
ATICG © 2002 ATI Capital Group, Inc. 5
Benefits to the Corporation
100% deductibility of PRINCIPAL and interest on ESOP loan to buy-out Shareholder.
Increased cash flow due to deductibility of principal on loan.
100% deductibility of DIVIDENDS paid to reduce ESOP debt or distribute to participants.
Collateral for ESOP created outside company. Preferred terms on ESOP loan.
Principal shareholder bought out for $0.66 dollars, compared to $1.52 dollars.
ATICG © 2002 ATI Capital Group, Inc. 6
How to Deduct Principal Under ERISA
Results:Tax Deductible
Principal &Interest
Assumptions:•$10,000,000 ESOP transaction•Terms: 8% APR; 10 yr. Amortization•Monthly P + I = $121,328
Assumptions:•$10,000,000 ESOP transaction•Terms: 8% APR; 10 yr. Amortization•Monthly P + I = $121,328
Lender Step 3 Co. makes payment to lender
$121,328
Step 2 ESOP makes mirror payment on Note Payable to Co.
$
ESOP
ABCManufacturing
Company
Step 1 $121,328 Co. makes contribution to ESOP (fully deductible)
$
ATICG © 2002 ATI Capital Group, Inc. 7
Benefits to the Selling Shareholder
• Tax Deferral on 100% of the proceeds from the sale of stock to the ESOP, under Sec. 1042 of the Internal Revenue Code!
If the transaction is structured properly, capital gains tax may be permanently deferred!!
NO CAPITAL GAINS TAX ON THE SALE OF YOUR STOCK TO AN ESOP – EVER!
•
ATICG © 2002 ATI Capital Group, Inc. 8
Powerful USE #2: Purchase of Capital Goods
Lender
Corporation
ESOP
CapitalGoods
1$ Loan
$ Loan 2 Stoc
k
3
4
5
The BasicTransaction
Collateral
Capital GoodsPurchased WithPre-Tax Dollars =INCREASED CASH FLOW
$ C
ash
$ Cash
Cap. Goods
CAUTION:Dilution!!
ATICG © 2002 ATI Capital Group, Inc. 9
Benefits to the Corporation
100% deductibility of PRINCIPAL and interest on ESOP loan to buy capital goods.
In addition to above deduction, can write-off capital goods a
second time by means of DEPRECIATION.
Increased cash flow due to deductibility of principal on loan.
Collateral for loan created by acquiring the capital goods.
Preferred terms on ESOP loan to acquire capital goods.
Capital Goods Acquired for $0.66 dollars (PT),compared to $1.52 dollars (AT).
ATICG © 2002 ATI Capital Group, Inc. 10
Powerful USE #3: Purchase of a Target Company
Lender
Corporation
ESOP
TargetCompany
1$ Loan
$ Loan 2 Stoc
k
3
4
5
The BasicTransaction
Collateral
Target CompanyPurchased WithPre-Tax Dollars =INCREASED RETURN ON INV.
$ C
ash
$ Cash
Ownership
CAUTION:Dilution!!
ATICG © 2002 ATI Capital Group, Inc. 11
Benefits to the Corporation
100% deductibility of PRINCIPAL and interest on ESOP loan to buy Target Company.
Increased cash flow due to deductibility of principal on loan.
Collateral for loan created by acquiring the Target Company.
Preferred terms on ESOP loan to acquire Target Company.
Target Company Acquired for $0.66 dollars (PT),compared to $1.52 dollars (AT).
ATICG © 2002 ATI Capital Group, Inc. 13
New LegislationNew Opportunities
• UNDER THE TAXPAYERS RELIEF ACT OF 1997 (effective January 1, 1998)
• UBIT No longer imposed
‘S’ CORPORATIONS CAN NOW UTILIZE ESOPs
ATICG © 2002 ATI Capital Group, Inc. 14
Tax Consequences
• Assumptions: S Corp 50% owned by
ESOP and 50% owned by individuals who pay tax at a 39.6% MTR
C Corp pays no dividends and pays tax at a 34% MRT
Both corporations earn $1M taxable income
Earnings net of tax left in company
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
C Corp S Corp
ATICG © 2002 ATI Capital Group, Inc. 15
Tax Consequences
• Assumptions: S Corp 100% owned by
ESOP and 0% owned by individuals who pay tax at a 39.6% MTR
C Corp pays no dividends and pays tax at a 34% MRT
Both corporations earn $1M taxable income
Earnings net of tax left in company
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
C Corp S Corp
ATICG © 2002 ATI Capital Group, Inc. 16
The Power & The Reality of‘S’ Corporation ESOPs
You can have a “For Profit”
corporation that is
“NOT”
subject to Federal Income
Tax on any level!!
ATICG © 2002 ATI Capital Group, Inc. 17
What Are the Differences??
• ‘C’ Corp. ESOPs Seller can take
advantage of Sec. 1042
25% of qualified payroll is deductible if leveraged; 15% if not leveraged
Earnings of Corp. are fully taxable
• ‘S’ Corp. ESOPs Seller cannot take
advantage of Sec. 1042
25% of qualified payroll is deductible
Earnings of Corp. are not subject to Federal Income Tax, to extent company is owned by ESOP
ATICG © 2002 ATI Capital Group, Inc. 18
What Are the Differences??
• ‘C’ Corp. ESOPs Seller, family of Seller, &
25% S/H are excluded from ESOP
Second class of stock allowed in ESOP, if it is the highest class of stock or convertible into the highest class of stock
Valuation reflects tax-affecting
• ‘S’ Corp. ESOPs Extensive exclusions for
family members and 10% or greater S/Hs under anti-abuse rules
Second class of stock not allowed (can have common non-voting)
Valuation often does not reflect tax-affecting
ATICG © 2002 ATI Capital Group, Inc. 19
Okay, But Who’s in Control??
Because if it’s not me, I don’t want any part of this ESOP concept!!
All I want is to controlmy business now and
after I die.
ATICG © 2002 ATI Capital Group, Inc. 20
The Structure of Control
A. If an ESOP holds a minority interest in
its Sponsoring Company’s Securities, control has not changed. No further action is necessary.
B. If an ESOP holds a controlling interest in its Sponsoring Company’s Securities, control has technically passed & further action is necessary.
ATICG © 2002 ATI Capital Group, Inc. 21
Methods of Maintaining Control
Maintaining Absolute Voting Control
• Don’t Do Any Planning & Don’t Sell Any Portion of Your Stock Holdings
• Own 51% Voting Control Outside of ESOP
ATICG © 2002 ATI Capital Group, Inc. 22
Methods of Maintaining Control
Maintaining Function Voting Control
• Be Appointed Trustee of ESOP – (temporary)
• Become Chairman of ESOP Committee That Directs the Trustee
• Obtain Lifetime Appointment as Chairman of the Board of Directors
• Obtain Lifetime Appointment as CEO
ATICG © 2002 ATI Capital Group, Inc. 23
The Flow of Control
Unallocated ESOP Shares
Allocated Shares
Directives
Participants
ESOP Committee
Vote
Vote
Trustee
Chairperson ofCommittee controls
Block could be controlling interest or minority interest.
Minority shareholders
- merger - reorganization - sale of assets- acquisition - liquidation
Company BOD Appoints: •ESOP Committee•Trustee of Plan
Shares actually in Partici-pant’s account.
Shares not in Participant’saccount.
Control is a matter of
proper structuring!
ATICG © 2002 ATI Capital Group, Inc. 24
The Emotional Issue of Control
• ASSIGNMENT: Defend financially (not emotionally)
why anyone would insist on owning 100% of a company, if he/she controls the vote.
ATICG © 2002 ATI Capital Group, Inc. 25
The Alliance
Project Manager/Consultant
CPA
Attorney for ESOP
Attorney for Corporation
Valuation Professional
Insurance Professional
Trustee
Plan Administrator
Lender
Investment Advisor
We ProvideYour
One-Stop-Shop
ESOP AllianceYour Strategic Partner
ATICG © 2002 ATI Capital Group, Inc. 26
Contact Information
• Sam G. Torolopoulos, CPA-ABV 222 West Las Colinas Blvd., Ste. 1346-E, Irving, TX 75039 214-920-1616, fax 214-920-1617 [email protected]
Web Sites:www.aticg.com