Mergers and acquisitions (M&A) in their usual form are done in a single closing. Sometimes there is some delay between signing the definitive agreement and closing, and sometimes it is simultaneous, but the closing itself is typically a singular event. From the buyer’s perspective, unless the buyer is huge and the purchase price small, it is a large risk to take on an entire company at once. To be sure, M&A attorneys have developed strategies to mitigate risk, including conducting due diligence before closing, but sometimes target company problems only become apparent after the buyer owns the company, even after a thorough due diligence investigation. And post-closing purchase price adjustment mechanisms do not always fully compensate the buyer for these problems.
Businesses organized as LLCs, just like with corporations, often find it advisable to form multiple LLCs to cover different lines of business to keep liabilities associated with one business isolated from the others. However, the formation of multiple entities increases the business’s administrative costs. For each new entity, there are filing fees and then ongoing franchise taxes with the state of organization and other states in which the company does business, separate tax returns, etc., so the business has to weigh these costs against the benefits of asset protection before making the decision to form new entities.
With limited liability companies (LLCs) having become a widely-used form of business entity for new private companies, I am often asked by LLC clients about compensating employees and other service providers in company equity.
The basic tax planning goal in setting up these equity grants is to avoid triggering an immediate tax to the recipient prior to any distribution of cash to pay this tax. This is not a practical issue with true startup companies that have no or very limited value, since there is not a significant tax. However, if the company does have value, and it makes a simple grant of equity to a recipient, there is taxable income to the recipient equal to the fair market value of the equity.