Bought my company - had to tell someone!
- Thread starter Mize
- Start date
digitalwanderer
Legend
SHHHHHH!!! Let the man enjoy the moment.John Reynolds said:Congrats, though my sympathies to your future stress levels.
My old man bought the electrical contractorship he was working for when I was about 6-7 and I still remember how exciting it was....the headaches don't come 'til a little later.
digitalwanderer
Legend
Do any bidiness over at US Steel? I'm sure the Qbop uses stuff like that...
Congrats, Mize. I'm in the middle of negotiations for a similar situation. The problem here is I'm intrigued by the ridiculous tax benefits of turning into an "S-Corp ESOP". Basically, if you're an "S" Corp and an ESOP, you pay NO income taxes whatsoever as a corporation. Makes it easy to pay back the debt of the buyout.
It's just a huge decision, no matter how you slice it. Good luck, brother.
It's just a huge decision, no matter how you slice it. Good luck, brother.
Same here. Im not too familiar with what that means (as this is my first motel purchase), but it kicks ass.Mize said:I did S-Corp
epic
S-Corp == Pay income tax of the business at your personal income tax rate. Of course, if this is a very large sized business, the highest personal income tax bracket is 38%... about the same as corporate tax rate.
S-Corp ESOP == Pay ZERO INCOME TAX, period. Depending on the size of taxable income, this could be a substantial amount, and justify the costs associated with the ESOP.
My situation is that the purchase is substantial enough, the only way to pay for the transaction may be the S-Corp ESOP, justifying the ESOP inconveniences by using the well over 7-figure savings in income tax that you now don't have to pay to help pay off the transaction.
S-Corp ESOP == Pay ZERO INCOME TAX, period. Depending on the size of taxable income, this could be a substantial amount, and justify the costs associated with the ESOP.
My situation is that the purchase is substantial enough, the only way to pay for the transaction may be the S-Corp ESOP, justifying the ESOP inconveniences by using the well over 7-figure savings in income tax that you now don't have to pay to help pay off the transaction.
covermye said:
Well the high-paid "big five" finace guy I hired said my S-Corp (which has no employees) would flow it's q-subs' profits through to shareholders and pay no income taxes other than what the shareholder's paid. The other thing I did was fund the company (my cash contribution) with little equity and lots of debt so I can pull the debt out as loan repayment (no taxes) plus interest.
I don't even know the details of ESOP - just that it means employee owned...what if I don't want to work for the company? What about all the other employees I don't want to own anything? How does that work?
Okay just read up on ESOPs and it's not my thing. Basically the employee retirement plan buys the company and profits pay off the acquisition and roll into employee accounts in proportion to salary. Seems like this gives up the big prize.
Let's say you have an S-Corp ESOP and sell it for 10x purchase price in 5 years...seems like the lions share of that goes into the retirement plan, no? I also read 40-80k to set it up - yikes!
Let's say you have an S-Corp ESOP and sell it for 10x purchase price in 5 years...seems like the lions share of that goes into the retirement plan, no? I also read 40-80k to set it up - yikes!
Mize said:
Right, but here's what I'm fighting:
Current ownership has a ridiculously (near zero) cost basis on a very, very large current value. Capital gains, even at 15%, will be out of this world. If an S-Corp ESOP purchases the company, thought, the current ownership (very "up there" in years, BTW) can elect "1042 treatement", which is a nice little legal equity swap. What happens is that they roll the cash immediately into a long term investment of some sort (long coprorate bond, etc...) that won't come due until after they die. They live off the interest, and here are the benefits:
- They pay no capital gains tax on the sale of the company, which would be millions and millions of dollars.
- When they die, the cost basis of their long term investment in the 1042 election gets an immediate bump up to current value. In other words, their heirs inherit an asset they can sell right away at no capital gains consequence.
If you're 85 years old, this is an attractive option. I'm not too crazy about it, but there ARE benefits to me this way though:
- Extra cash flow means the loan is paid back MUCH faster
- Extra cash flow means I can afford not to have to make sacrifices at first, and pay myself a very "fair market" wage.
- I am allowed to set up a rather generous "golden parachute" to protect myself in the event of disaster, etc...
- This is a small company just busting at the seams to grow, and current ownership doesn't want to take it there. It's as big as it will get without an influx of management talent. We're set up in a very small town (~1000 people), though, and the talent pool is about as big as a mud puddle on a paved driveway. The ESOP program could be a useful tool to lure in the talent needed to grow multiple times over...
Benefits of not doing the ESOP are obvious. The problem with that is, I've been witness to poorly planned family business succession for two generations now, and seen the ugly mess that they can turn into. My family may be better off in the long run with no ties to an illiquid asset that will be much bigger than they can handle at the time that something may happen to me.
congo rats!
I am about to start my own business. Actually, i think it will start as a part of my dads business and then later it will likely become a seperate entity (or buyout the rest of my dads business). I have finally hit on a solid plan for which I have managed to piece together every detail except for one specific marketing expense that I really don't think will be prohibitive but there is the chance that it will. I'm psyched as hell.
I am about to start my own business. Actually, i think it will start as a part of my dads business and then later it will likely become a seperate entity (or buyout the rest of my dads business). I have finally hit on a solid plan for which I have managed to piece together every detail except for one specific marketing expense that I really don't think will be prohibitive but there is the chance that it will. I'm psyched as hell.
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