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Forming a Management Entity
September 20, 2018
Estimated Reading Time: 4 minutes 10 seconds
Many organizations experience a level of growth that stretches the leadership or executive team thin across several entities. This is especially true when there is one executive that is responsible for the day to day decisions of several operating units or divisions.
Eventually, a strategy will center around forming an entity to manage and/or control the other entities through direct ownership or an operating agreement. Having a management company (“MGTCO”) can often be part of an flexible long term strategy, particularly when the overall owners are considering an exit.
One thing the management company is not (at least by itself) is a tax haven or some “magic tax bullet”. A MGTCO can be part of a tax management strategy, but are often just one part of an overall strategy and do not necessarily provide any intrinsic tax benefits.
The key item to making the most of an MGTCO is dependent on the structure of the overall collective ownership across all entities. The more diversified the ownership across all the entities, the stronger the possibility that the management company will provide tax benefits and support a plan that favors the owners of the management company.
Objective One: Create a Management Company without a controlled or combined group
- The MGTCO would NOT own any of the other locations
- The MGTCO would be owned in a way that would not create a consolidated group
- The MGTCO would enter into binding agreements to manage each location for a set fee
- The MGTCO could also hold intellectual property for licensing
- The Executive owner’s salary and retirement plan would be setup in the MGTCO only
Objective Two: Flexibility to dispose of locations in whole or in part
- Consolidating the locations to be owned by one entity would create a difficult scenario when attempting to sell one location or all locations
- Management agreements allow the core owner’s of each entity to retain ownership while managing profits through the management/licensing agreements
- Ability to franchise additional stores would be easier if the model is demonstrated through the current business structure
Objective Three: Enable an executive level salary & retirement plan
- Defined benefit or cash balance plans require high salaries and a large age and pay disparity between employees and owners
- With management & licensing revenue from 4 (or more) locations, MGTCO could support a high salary and large retirement plan contribution without needing to offer benefits to location employees.
- MGTCO would have few employees and only intangible assets
Objective Four: Manage current ownership & business structure
- The ability for the MGTCO to exist outside of the location’s is contingent on modifying the ownership of the stores to prevent consolidation
- The main owners would have to own collectively 50% of any singular location and not have identical ownership percentages per location.
- Consider Q-sub elections or S-corporations for additional entities or locations.
If your business would benefit from any of the objectives listed above and has multiple locations or entities, we would like to talk to you about how to make a MGMTCO work for you.
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