Kingsley Management Case Solution

1. Given the current business plan, would you recommend that Kingsley Management be structured as a C Corporation or as an LLC? What are the advantages and disadvantages of each form for Kingsley Management? You should be prepared to defend your recommendation quantitatively.

The choice of LLC or C Corporation is very critical at this stage of business for Kingsley Management because this decision will determine their ability and mode of raising funds. LLC practically combines limited liability feature of a corporation, operational and tax benefits of a partnership. In case of LLC, Kingsley Management would be protected from unlimited personal liability. Another very important aspect that Kingsley Management has to consider is that corporations have a set pattern and standard procedures for management purposes. On the other hand, LLC’s will give a lot of flexibility to Kingsley regarding management and lay out the infrastructure according to their plan. There are no requirements for annual general meetings and being answerable to the board of directors. Record keeping and hectic administrative work associated with a LLC is far less than a corporation. Therefore, from Kingsley management’s perspective, LLC is a much better choice as compared to C Corporation as far as management is concerned. However, C Corporation is better than LLC as far as the ability to raise funds is concerned. In case of Corporation, there is no limit to the number of shares that the management chooses to issue. The company can issue shares of its own choice whenever required. Corporation given an option of giving stock options to the management and employees so that there is no conflict of interest and management takes decisions that are in the best interests of organization and shareholders. However, Kingsley Management is very confident about the funds; they can choose to ignore this useful aspect of C Corporation.

The biggest concern for investors regarding the choice of LLC or C Corporation is the different tax treatment of the two modes of businesses. Corporate tax rate for C Corporation is 40% whereas tax rate for capital gains on LLC was 20%. In case of Corporation, cash flow to investor can be calculated by adding the profit after tax at the rate of 35% to depreciation. Debt payment should be then subtracted from that sum to come up with cash distribution to shareholders. Personal tax at the rate of 40% should be subtracted from that amount to come up with net cash payment to shareholders. In case of LLC, pre-tax profit should be used because unlike corporation, profit for LLC is taxed just once at the individual tax rate for capital gains i.e.20%. Pretax profit should be added to depreciation while debt payments should be subtracted. After deduction of tax at 20%, net cash for investors is obtained.