There’s just no stopping it. The capital amassed by private takeover firms is simply overwhelming. Any reasonable person could conclude that public utilities face wholesale changes in terms of...
managing shareholders collectively receive at least 1 percent of each item of company "income, gain, loss, deduction, or credit during the entire existence" of the company. The IRS will, however, permit this 1 percent to fall to as low as 0.2 percent as total capital contributions to the company increase from $50 to $250 million. The IRS will also allow temporary departures from the rule in some situations.
These shareholders, as a group, must have a "capital account balance" at all times of at least 1 percent of "total positive capital account balance" or $500,000, whichever is less. The operating agreement must require them to contribute additional capital at the same time as other shareholders to maintain this minimum balance. But managing shareholders need not maintain any particular capital account balance if at least one managing shareholder is contributing "substantial services" to the company for free. However, in such a case, the operating agreement "must expressly provide" that they, as a group, will pay in more capital "upon the dissolution and termination" of the company to cover any deficits in their capital accounts. The managing shareholders may be able to get away with less than a full deficit makeup; they may contribute as a group an amount equal to 1.01 percent of total capital put in by the other shareholders (with credit for any capital they contributed previously).
Keith Martin is an attorney with the Washington, DC, law firm of Chadbourne & Parke.
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