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I am currently the owner of a heavily regulated business ("RP"),

a Sub-S corporation, with a...
I am currently the owner of a heavily regulated business ("RP"), a Sub-S corporation, with a less-than-pristine regulatory history. We're purchasing the assets and related good will (Not the actual entity) of another business ("RR") in the same industry.

We want to form a holdings company ("HC") to purchase these assets. Additionally, I have an investor who does NOT own any stock in RP, but rather owns a number of the assets of RP which he "Leases" to us. We want to transfer the assets of my investor to the HC, in exchange for stock in HC; RP would then lease the assets from HC rather than the investor. HC would also own any future assets to be "leased" to RP. Additionally, we might want to merge RP into HC in the future, to shed the related regulatory history of RP and possibly for tax ramifications.

Oh, and we have 11 business days until closing. RP and RR, as well as the yet unborn HC, are in Pennsylvania.

My question is: What is the best corporate form for the HC? Can I draw up a asset purchase agreement under the new entity that would be actionable, if it's signed and (potentially) closed before the new entity exists? Or, if I bought it personally, could I then easily incorporate it at a later time (matter of days to weeks)?
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Answered in 13 minutes by:
6/19/2013
Dimitry K., Esq.
Category: Business Law
Satisfied Customers: 41,221
Experience: Run my own successful business/contract law practice.
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Thank you for your question. I am a licensed Pennsylvania professional. Please permit me to assist you with your concerns.

I am seeing a few potential concerns here. A Sub-S Corporation under PA law cannot own or be owned by other business entities including other holding companies. If you are attempting to create an HC where your original entity and the new entity with good will end up, you would also need to consider changing your business structure for the S Corp to an LLC, do the same with the HC, and then consolidate. You can create an asset purchase agreement into the HC, but then you would still need a vehicle to transfer it into the S Corp. Buying good-will personally is also possible but my concern is because you stated that this industry is heaving regulated, you would need to create the entity based on those conditions--while it is easy to purchase incorporate in most businesses, I cannot tell you if your industry would allow it.

Good luck.

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Customer reply replied 4 years ago

The HC would never own RP, it would own assets currently owned by the investor, the current assets of RR, and potentially other assets in the future which would in turn also be "Leased" to RP... And potentially, it would later acquire _ALL_ the assets of RP and RP would simply be dissolved.


 


Just the same, it's odd to me that a Sub-S cannot own entities, and this HC *MIGHT* want to do so in the future. That said, how about a LLC taxed as a Sub-S? If the answer is yes an LLC can; Then is there any disadvantage you can see to doing LLC as opposed to a second Sub-S?

Kevin,

Thank you for your follow-up. A Sub-S can obviously engage in contractual agreements with the HC, it is just not able to be a part of it. An LLC is not taxed as a Sub-S although their tax structures are fairly similar--a Sub-S tends to pay less if the income is under $200,000 or so, and then the LLC becomes a more favorable tax entity. But an LLC cannot be taxes as a Sub-S although both are potentially pass-through entities. The disadvantage of an LLC is that an LLC can always be bought or sold which a Sub-S is far harder to accomplish. It is easier to add shareholders to an LLC, so if the point is for you to be able to at some point transfer or sell the assets to someone else, the LLC is a better solution.

Good luck.

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Customer reply replied 4 years ago

Ok forming an LLC. I'm not entirely clear on why my initial attorney steered me to Sub-S some 10 years ago, actually. :shrug:


 


Now - And this is important - Can I draft a contract between RR and HC (a yet-non-existent Pennsylvania LLC) that will be actionable before the LLC actually exists? (eg, escrow the cash as the LLC's 'Principle,' state that it's due-payable by the LLC by a date-positive, and assume control of the assets while the paper-shufflers are shuffling their papers)


 


I expect not - And if that's the case - what are the implications of having the assets sit on my personal balance sheet for a few days/weeks?

Thank you for your follow-up, Kevin.

If a business entity does not yet exist, it cannot create contracts or enter into agreements. There is an argument for the HC to be treated as corporation by estoppel, but it would still create personal liability in tort and potential liability from the industry for failing to follow the regulatory conditions.

As for the assets remaining on your personal balance sheet, you would need to show profit and also potentially need to personally comply with whatever industry standard the actual entity has to comply with.

Hope that clarifies.

Dimitry K., Esq.
Category: Business Law
Satisfied Customers: 41,221
Experience: Run my own successful business/contract law practice.
Verified
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