CVRs can transfer much of the risk normally borne by acquirers to the shareholders in the target corporation.
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Under current law, S corporation shareholders only increase their basis in the S corporation for loans made directly to the corporation by the shareholder.
The Morgan Stanley case, filed in state court in New York, is a so-called "derivative suit" in which the lawyers are trying to place themselves in the position of the corporation to recover money shareholders allegedly lost because of bad behavior by insiders.
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The most egregious exploiters of the current S corporation advantage are shareholders in personal service corporations, generally those companies in the business of providing services in the fields of health, law, engineering, architecture, accounting, athletics, or consulting.
To prevent double taxation, shareholders are required to increase their basis in the S corporation stock by income and decrease it by losses, distributions, and nondeductible expenses.
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Another advantage with LLCs: Entrepreneurs can divvy up profits any way they choose, as opposed to shareholders, who have to carve up the spoils in proportion to their percentage ownership in the corporation.
This is so because it can be argued that the S corporation would not generate any revenue without the personal services of its shareholders, and thus the entire amount of S corporation income should be paid out in salary.
The truth is that, unlike a typical operating company (such as an industrial corporation) where the goals of management and shareholders are usually the same, in the case of a mutual fund, the goals of the fund and its shareholders on the one hand and the goals of the money manager on the other hand, are not necessarily the same.
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Another advantage to LLCs is that entrepreneurs can divvy up profits any way they choose, whereas with shareholders, the spoils have to be carved up in proportion to each shareholder's percentage ownership in the corporation.
In a dramatic departure from current law, however, the existing restrictions on eligible S corporation shareholders would be repealed.
In the fictional transaction, cash equal to the elected amount is deemed distributed by the corporation to its shareholders and then immediately contributed by the shareholders back to the corporation.
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