BOSTON -- If you are an owner of an investment management firm and are thinking of retiring in five years, you should be thinking about restructuring your firm's tax position, said Arthur Gottlieb, a vice president at Boston-based investment bank Downer & Co. LLC.
A third of the 76 investment management firms recently surveyed by Downer are organized as C corporations, even though most are entirely employee owned.
"You have to be thinking about ownership transfers today to sell later. If I buy the stock of a C corp., I never get any tax benefit from that purchase until I sell at a later date," Mr. Gottlieb said.
"But if I buy the stock of an S corp., I can get the tax benefit of that purchase because there are ways that allow me to treat it as an asset purchase," he said.
C and S refer to the subchapters of the Internal Revenue Code under which firms are organized for federal tax reporting purposes. A C corporation pays a corporate tax based on income. An S corporation is usually a small business with a statutorily limited number of shareholders; the firm's taxable income is taxed to its shareholders at regular income tax rates.
Owners who convert to an S corporation from a C corporation won't see a tax benefit for about 10 years, so it's not something a firm should do if the owners want to sell in the next year.
"This is not an operational matter for the company, either. It's a task for accountants and attorneys, and the conversion should be done today to start the clock running," Mr. Gottlieb said.
Downer specializes in middle-market corporate acquisitions and divestitures.