Industries Inc. is a C corporation with a July 31 year end. The Company was founded in 1934 with 2 original shareholders. It is closely held, with 11 shareholders. The shareholders are individuals and trusts. The corporation is held by 3 different families. Ownership is approximately 1/3 per family; one family is headed up by a son of one of the founders; another family is headed up by the other son of the same founder. The third family is headed up by a son of the other founder.
The Company has a number of business units; it is involved in both engineering and
manufacturing. Contracts are accounted for on the percentage of completion basis. The Company also owns a significant amount of real estate; all of the real estate is actually used in the business.
The Company’s business cycle is an extended one; accordingly, the Company has had years of significant taxable income, as well as years of taxable loss. The Company has, in recent years, paid dividends in varying amounts to its shareholders.
The Company would like to explore the possibility of making an S corporation election. Total assets at 7-31-20 were 10.0 million, pre-tax book profit in 7-20 was $110,000, and in 7-19 was
$478,000.
In this case scenario, think about all the factors that would inform a decision as to the choice of a form of entity and a business entity conversion.
Prepare a memo to the client indicating issues considered, areas where more information might be needed, and preliminary indications or recommendations. Possible topics to be addressed would include:
● desirability of the conversion
● conversion issues
● administrative complexities
● additional resources that might be required
● any general business issues identified
