Business reorganizing or restructuring is an action taken by businesses to significantly modify the structure or the operations of the company. This usually happens when a company is facing significant problems and is in financial jeopardy. But it often happens to enhance it’s competitive position, to protect its assets or to get out in front of a problem. It’s another tool in their tool box. Some examples of Global 500 companies:
Global 500 Re-orgs
- Forbes announced, Jeff Bezos is unloading a billion dollars of Amazon stock.
- In 2015 Caterpillar announced restructuring and cost cutting plans right before they were hit with a $2 billion penalty for tax fraud.
- In 2018 John Deere announced realignment of leadership responsibilities.
- Humana’s CEO-founder had twice before had shifted the company’s course to a brand-new industry.
- Chase Manhattan Bank and Chemical Bank used their merger as an opportunity to both reduce operating costs and achieve an important strategic objective.
- Scott Paper‘s chief executive officer (CEO) decided to implement the layoffs quickly—in less than a year—to minimize workplace disruptions and gain credibility with the capital market.
We’ll probably never know why they reorganized. What matters is they reorganized for some reason. Despite the massive size of Global 500 companies, and despite the difficulties presented by re-organizing a massive company, they are not afraid of re-orgs.
Privately owned business re-orgs
Privately owned businesses seldom re-organize. It’s just not one of the clubs in their bag. They’ll ride their present structure right into the ground even when the company is collapsing around them.
Never fall in love with your company. You can fall in love with your business. A business has value because that’s how you make money. A company is a legal creation for operating a business. Nothing more & nothing less. Most people don’t think this through well enough and get the two confused. A few years of operating your company like it was your business can put you in vulnerable position.
If most companies lose a lawsuit, they could lose everything they’ve been building all their lives. If they win, the litigant can strip your company bare. We plug that hole through business re-org by removing everything of value from their operating company and putting it in an LLC that does no business what-so-ever. It never does anything to get itself sued. If everything of value is in the LLC, and the mothership loses a lawsuit, you can just shutter the doors and start over again with a new company the very next day with everything of value behind an impenetrable LLC barrier. The LLC just needs to license it to your new company, and you’re good to go. Since you own both of them, there are no barriers.
Business restructuring and reorganization is one of our strengths. I personally have been involved in two Fortune 500 re-orgs & countless re-orgs of private companies. Not all of them have followed the approach we describe in this post. There are many ways to re-org and many things a business wants to accomplish. Every private re-org I was involved with succeeded without repercussion. We re-org our clients frequently for tax purposes. We have significant expertise in this area.
An actual example.
A few months ago I got a call from a client who was being sued by a marketing company. They had entered into a contract and the marketing business failed to perform, so my client quit paying the marketer. But there was a contract, and the contractor sued the company, but not the individuals. There was no way to sue the individuals. Their lawyer was vigorously defending the suit. He warned them it could cost several thousand dollars to defend suit. He also warned them, they could lose the suit.
For some reason they called me.
- I questioned them and discovered they hadn’t recorded any business assets. Their company was basically a vacant shell. There were assets, but no assets had been recorded in the company. They were still owned by the owners.
- I advised them to abandon the company.
- I also advised them to simultaneously form two new companies, an LLC to hold company assets, and a corporation to operate the business.
- I then advised them to legally transfer all the business assets into the first new company (an LLC), including web sites, trade names, trade secrets, and everything essential to carrying on businesses. Since they had never trademarked their name, I suggested the do that in the name of the LLC.
- Simultaneously again. I advised them to open new bank accounts in the name of the new corporation and begin conducting business in the new corporation.
- I also advised them to run this past their lawyer. He said it would work. The only thing he suggested is to file bankruptcy on the old company that had failed. That was a good final touch.
- It did work. The marketing company, rightly or wrongly, was got nothing but legal fees.
Tax savings
This methodology is one of my favorite re-orgs. It is used to protect vital assets and to change the character of earnings. It can also be used to eliminate C corp taxation by removing earnings from a C corporation and turning it into royalty income on the personal returns.
That eliminates an entire level of taxation.
bizztrategy @ Ellis CPA 