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Decision to purchase a manufacturing company

Mr. Jones wants to buy Smithon Manufacturing because it is very profitable. Right now it has 30 shareholders but no single majority shareholder. It is a C corporation with a fiscal year-end of December 1. In order for Mr. Jones to buy this company, he will need to invest a lot of money in new manufacturing equipment, which means that Smithon will incur a loss for two years. Mr. Jones want to buy the company effective January 1. He thinks, he should buy the company from the shareholders and convert it to an S corporation. Also, Mr. Jones wants a fiscal year-end that is also a calendar year-end, i.e., December 31. They should consider whether Mr. Jones could issue shares of stock from Johnson Services which is a C corporation to the shareholders of Smithon in an exchange of shares. That way, the current Smithon owners would become new shareholders (but not owners) of Johnson Services and he would get all their shares of Smithon. If Mr. Jones does so, he could probably offset Smithon's profits with the losses from Johnson Services.

Questions:

1. Should Mr. Jones purchase the stock of Smith outright, leaving Smithon intact? What about issuing debt in his Johnson Services company to pay for the Smith Company - would that raise debt to equity issues?
2. Should Mr. Jones convert Smithon to an S corporation and change the fiscal year end to a calendar year end?
3. What potential income tax ramifications exist for Mr. Jones personally if he purchases the stock of Smithon and converts it to an S corporation?
4. Should Mr. Jones merge Johnson Services with Smithon? What type of merger or acquisition would be best (i.e., A type, etc.)?

Solution Preview

1. Should Mr. Jones purchase the stock of Smith outright, leaving Smithon intact? What about issuing debt in his Johnson Services company to pay for the Smith Company - would that raise debt to equity issues?

Mr. Jones should purchase the company outright, leaving the company intact. It would be the least expensive type of transaction with the lowest related administrative costs and other fees to contend with. The savings incurred on the straight, outright purchase can then be used for other purposes and seen as a cost savings because Jones used the means to purchase the stock that would produce the greatest savings. If Jones issues debt, it would raise issues because Smithon may not have the cash available to support the debt, and the debt would decrease Smithton's liquidity. It ...

Solution Summary

1. Should Mr. Jones purchase the stock of Smith outright, leaving Smithon intact? What about issuing debt in his Johnson Services company to pay for the Smith Company - would that raise debt to equity issues?
2. Should Mr. Jones convert Smithon to an S corporation and change the fiscal year end to a calendar year end?
3. What potential income tax ramifications exist for Mr. Jones personally if he purchases the stock of Smithon and converts it to an S corporation?
4. Should Mr. Jones merge Johnson Services with Smithon? What type of merger or acquisition would be best (i.e., A type, etc.)?

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