Opportunities in Organizational Restructuring

By Wayne F. Currie

This is the first in a series of columns on the management, ownership and growth of a privately owned masonry business. We will identify proven opportunities for readers to increase profits and to maximize the net-worth of their businesses.

We work with the owners of a variety of small businesses to identify organizational strategies that are easy to set up and that provide immediate cash flow benefits.

We start by asking questions. Take a look at your own situation right now, preferably with some paper handy.

What do you expect to get out of your business in terms of income, net profit, and long-term value? In other words, what are your day-to-day, week-to-week and year-to-year goals? (Ideally they should be written down).

How are the results, compared to your hopes and dreams? Are you hitting sales targets? Is your take-home pay for ownership meeting your goals? Are you setting aside tax-deductible dollars for personal health insurance? Are you in a benefits package to take care of your long-term future? Make some lists here.

More importantly, what actions can you take, at minimal cost, to improve the net benefit of ownership?

Many masonry businesses are a sole proprietorship, a Subchapter "S" corporation, or more recently, an LLC. This may not be the most beneficial structure under today's tax climate.

By setting up a small corporation for the family, owned by the children with the parents as trustees, equipment you presently own (or what you will be buying) could be bought by the company. It can then be leased back to the sole proprietor or the operating company.

Profits on continued leasing of equipment used by the masonry business would distribute from the operating company to the family leasing company. If the profits in the leasing company, as a "C" corporation, are under $50,000 per year, a minimum tax rate in the range of 15 percent will apply to this cash flow. Often we find fully depreciated equipment in sole proprietor hands which can be exchanged for preferred stock in a "C" corporation, initially tax free, on a sale and leaseback transaction.

With a new depreciation schedule based on equipment fair market value, you may find cash accruing without any income tax at all, initially. The lease payments will reduce the taxes on the operating business transferring the cash to the family enterprise.

Call some local equipment leasing companies to get competitive lease rates and the form of lease to use. Most will make such proposals at no cost to you.

Funds earned can then be invested, first paying off equipment loans where needed. Later the accrued profits may allow you to distribute cash to children by way of loans for educational or life objectives. Such funds are taxed later at the personal level.

For example, distribution to children of compensation or dividends when they are at college may be offset by deductions for tuition, books and travel, for example, which are now becoming deductible to the individual student. This in essence would result in the only taxes being at the 15 percent level in the "C" corporation.

What if your office, warehouse and storage yard were purchased by this same company, with a bank loan against a lease signed by the sole proprietor or operating company? This is a simple way of splitting off estate assets and allowing the growth to accrue for the benefit of family members. Payments on leases are deductible expenses for operating businesses and the profits are often sheltered by depreciation.

The impact of some of these ideas is to help the family unit achieve a distribution of net income to lower tax rate family members, such as children or to pay only 15 percent tax on investment dollars held in a family company for future goals and objectives.

Your accountant could assist you in reviewing the potential impact of moving some income to family members now, while reducing the profit of the operating business. This would presumably improve the net after tax income from the business. If health insurance is a major cost, making sure you have a "C" corporation in place will allow you to deduct premiums where other tax structures do not. Similarly, deferred compensation plans, small 401(k) plans, and other employ benefit programs are more appropriate to the "C" corporation structure.

We encourage you to look at those additional steps you might take to allow Uncle Sam's rules increase your owner's take home pay. Talk to your accountant and attorney about structuring some income sharing and asset development strategies to increase your family's take-home with help from the IRS.