Entrepreneurial slicing and dicing comprises a small-business art form. It happens when a business founder wants to bring in other owners. It occurs for reasons including retirement, financing, employee rewards and incentives, attempting to assure family harmony and estate planning.

Take for example a company we will call Concrete Clothing Corp., a firm known nationally for suits that mobsters put on victims before they are thrown from boats and bridges. Since demand is high, the company has prospered since Al Gorio founded it.

Being nothing if not generous, old Al gives big chunks of stock to his children, Ensalada and Forklift.

"As attorney for your children, I hereby demand that you stop paying yourself and give Ensalada and Forklift all the money."

Ungrateful
The lawyer, Quentin Quagmire, points out that Concrete Clothing, which is an S-corporation, doesn't pay taxes. The business reports to the IRS, but shareholders pay taxes, Al, who gets a big salary, and Ensalada and Forklift, who get no money at all.

Still, the company has huge profits, and Al gets a bonus to pay taxes on his share. The children get nothing but a bill from the IRS.

Quagmire's letter concludes: "Since you made such a mess of this, you probably ought to sell the company and divide the proceeds."

Poor Al can't believe it. He calls Maxine McKnife, his lawyer. "Little Maxie," he pleads, "help me. What should I have done?"

"Well," says McKnife, "first you should have made an agreement saying that Concrete Clothing would give Ensalada and Forklift at least enough money to pay taxes resulting from stock ownership. Also, you should have a few other provisions."

Salary Too High
Your salary is high for someone in the concrete clothing business, says McKnife. As minority owners, the children may want to challenge that. Maybe, however, you can sweeten their deal a little. Not only do they get free stock, they get no-work salaries.

"In addition," says Maxie, who talks like a lawyer, "Ensalada and Forklift may not want you investing a lot of money in gas stations, restaurants and airlines. They want to invest in European vacations, all first class. By objecting, they can queer all your deals. You won't have any power."

McKnife recommends a contractual provision giving Al all the power to decide.

"Why would Ensalada and Forklift agree to that?" asks Al. "Us Gorios don't raise no dumb kids."

"I can't think of a single reason," replies Little Maxie, "except that maybe you will give them a lot of money to sign the deal."

CPAs and Taxes
All these complexities have big tax consequences. Al's accountant will get into the act, and so will a CPA for the children. Concrete Clothing will pay both bills, creating still more tax problems.

Al goes home, sorrowful and depressed. "This isn't any fun, any more," he tells his wife. "Lets sell Concrete Clothing and goof off in Europe with the kids."

"Okay," replies the wife.

A buyer appears, and all concerned, including Ensalada and Forklift, begin working on a deal. The youngsters object to the price, the payment terms and everything else about the transaction. Power is the problem.

Three CPAs are in on the deal, Al's, the children's, and the buyer's.

"We agree," they say, "that this deal will have pooling accounting treatment."

"What's that?" shout Ensalada and Forklift. "We don't know what that means."

Playing Pool
"I think," says McKnife, "that pooling means the buyer won't have to amortize good will. I don't know, because I'm just a lawyer. This is part of the priestly mysticism of CPAs."

The buyer's CPA is eager to explain. "There's no mysticism about this," she says. "Either do it our way or the deal is off."

"We're not going along with this," say Ensalada and Forklift as they stomp out the door. "We need to do our Christmas shopping."

Everyone leaves except Al and McKnife. "I guess there should have been an enormous contract," he says. "I just blew it when I handed over shares of stock."

"Yes, you blew it," Little Maxie agrees. "Now you must spend the rest of your life working to give the children whatever they want, just as when they were 3 years old. Good luck, Al, and happy holidays."

At least Al didn't slice in a venture capitalist. Such people are far worse to deal with than your kids. As always, power is the problem.

If tempted by entrepreneurial slicing and dicing, check F. Tannenbaum's "Slicing It Up," 9:2 Business Law Today 52 (Nov.-Dec. 1999).