Equity Structure of Noncorporate Entities
66 Pages Posted: 11 Oct 2016
Date Written: October 5, 2016
This article identifies and classifies various types of equity structures of noncorporate entities. It recognizes that equity structures fall into two general groups: allocation-dependent structures and distribution-dependent structures. The article describes the differences between those two general groups of structures and the typical types of structures within each of those groups. As noncorporate entities continue to gain prominence more and more such entities appear to be adopting distribution-dependent structures. Such structures can become quite complex, often incorporating finance concepts. The article therefore provides the financial tools needed to properly understand the more complex structures, especially those that incorporate internal rate of return (“IRR”) and Microsoft Excel’s XIRR function. After identifying some of the shortcomings that can appear in such structures, the article recommends a better way to incorporate IRR in situations where business owners insist upon using it. Finally, the article briefly discusses some of the basic tax issues that distribution-dependent equity structures raise.
Keywords: Partnership, limited liability company, LLC, profit allocation, distribution waterfall, time value of money, IRR, XIRR, net present value, future value, internal rate of return, hurdle rate, allocation-dependent equity structure, distribution-dependent equity structure
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