I have a client that is currently a MMLLC. The owners have basis of $3M in their capital accounts. They are working with an ESOP advisor who is proposing the following:
1. Convert the $3M capital accounts to debt
2. Convert to C-Corporation and form an ESOP
3. Have the ESOP purchase approx 25% of the stock from the corporation for $3M.
4. Going forward, the corp will make contributions of approx $500K/yr to the ESOP. The ESOP will turn around and pay the corp $500K/yr towards the stock purchase. The corp will then pay $500K/yr to the owners towards their loan to the corp.
As you can see, the owners will get their $3M paid out to them tax free and the business effectively gets tax deductions for servicing that debt.
Is there a problem here?