Author Topic: Trump Organizational Structure: Why is it set up this way?  (Read 10143 times)

protostache

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Trump Organizational Structure: Why is it set up this way?
« on: August 02, 2015, 07:01:24 AM »
(this thread is specifically about The Trump Organization and it's structure. Let's leave politics out of it, please.)

I started trying to parse Donald Trump's financial disclosures yesterday and I was struck by an odd pattern: the use of "manager" corps.

For illustration purposes, let's look at Trump Vineyard Estates LLC. On page 11, it lists:
  • Trump Vineyard Estates LLC
  • Trump Vineyard Estates Manager Corp
On page 24, it says that Trump Vineyard Estates LLC owns a winery worth between $5mil and $25mil. "Trump Actual" collects in the neighborhood of a few hundred thousand dollars of rent.

Page 88 lists ownership of Trump Vineyard Estates LLC as 99% DJT Holdings LLC and 1% Trump Vineyard Estates Manager Corp, which is also the managing member (has complete control).

Page 89 lists ownership of Trump Vineyard Estates Manager Corp as 100% Trump Actual.

If you scroll way back up to page 52 you'll see DJT Holdings LLC is the owner of 99% of quite a few companies. It has a similar structure as the vineyards, with 99% resting with Trump Actual and 1% with DJT Holdings Managing Member LLC, which is in turn owned 100% by Trump Actual. Each one of the companies owned by DJT Holdings LLC has a similar structure, or slightly more complicated with additional minority owners.

But then there's all the other companies that are slightly flatter, with just the operating LLC and manager corporation.

Can anyone shed light on what benefits this offers?

Specific questions:
  • What protections does the two entity 99% member / 1% manager structure offer? It must have some huge benefit, if they're doing it all the time like this
  • Why would the more recent manager entities be corps instead of LLCs? It seems like they're all owned by Trump Actual and all registered to the same address in NYC, mostly with the same three people at the helm (Trump Actual, same treasurer, same secretary).
  • What possible ways could I apply this to my own business (low six figures, software consulting and publishing)? Is it only really beneficial for real estate?

Cathy

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Re: Trump Organizational Structure: Why is it set up this way?
« Reply #1 on: August 02, 2015, 08:58:48 AM »
What protections does the two entity 99% member / 1% manager structure offer? It must have some huge benefit, if they're doing it all the time like this

Although I have no specific knowledge of what Trump's goals are, I would suspect that this structure is intended to make it more difficult for creditors to get money out of these entities.

One of the major differences between a limited liability company ("LLC") and a joint-stock company ("corporation") is that a corporation has shares while an LLC does not have shares. If a creditor C has a judgment against an entity E that owns 99% of Q Corp, the court can simply order the entity E to turn over its shares in Q Corp to the creditor C, or to sell the shares and pay the proceeds to the creditor C. By contrast, if the entity E owns no shares and instead has a 99% membership interest in W LLC, there are no shares to be sold, so the creditors can only levy on any moneys flowing out of W LLC to the entity E (a "charging order"). The trick here is that W LLC is fully managed by the 1% owner, namely W Managing Corp. Under the documents governing W LLC, W Managing Corp has full discretion about whether to cause any money to flow out of W LLC to the 99% owner, entity E. Thus, W Managing Corp will simply decline to cause any money to flow to entity E so the charging order is not effective at getting money out of W LLC.

This scheme is, of course, not bullet proof. The creditor C will craft other arguments to try to get their money. For example, the creditor might argue that W Managing Corp is in fact a sham and that entity E really has full control over and full ownership of W LLC, despite what the documents say. To defend against that argument, the various separate entities will have been carefully crafted to have wholly separate operations and legitimate independent reasons for existing, such as articulable business purposes for their specific existences.

The reason for having so many layers of entities is presumably to further increase the difficulty for creditors wanting to get money out of these entities, as creditors will need arguments to get past each new layer.

Why would the more recent manager entities be corps instead of LLCs?

I'm not aware of any obvious reason why corporations would be preferable, but it might be to inject diversity into the hierarchy to make it harder to argue that the various entities are shams. It might also be that the jurisdictions where these entities are incorporated have some specific case law that is unfavourable to creditors, but the cases are specific to corporations. Keep in mind that corporations are a much older company structure than LLCs, so there is a lot more case law about corporations. There is much more uncertainty about the law of LLCs, by comparison.

What possible ways could I apply this to my own business (low six figures, software consulting and publishing)?

One thing you should understand is that all of the discussion above is unrelated to taxation under the Internal Revenue Code ("IRC"). There is a lot of confusion on this point, but as a general rule, the legal nature of the entity is not determinate of how it is taxed. In the IRC, the term "corporation" means basically any association of persons with a profit motive, including associations that are in fact not "joint-stock companies" (what I've called "corporations" above). In general, the choice of entity is not a taxation choice, because taxation choices can generally be made independently of the type of entity.

As described above, the asset protection advantages of the Trump-style structure relies in part on you being able to articulate a valid business reason for the various separate entities, such that they are not just shams. You may find that difficult to do in a very small business.

protostache

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Re: Trump Organizational Structure: Why is it set up this way?
« Reply #2 on: August 02, 2015, 10:08:10 AM »
Thank you Cathy! I had researched charging orders but it didn't really click until you mentioned that the 1% managing member would have complete control over distributions, and since there is more than one member the potential for piercing the veil is quite a bit less than if it was a SMLLC.

Cathy

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Re: Trump Organizational Structure: Why is it set up this way?
« Reply #3 on: August 02, 2015, 03:22:28 PM »
I should add that although I described the Trump structure, I was not intending to suggest that the structure would actually work as intended. If all of the entities bubble up exclusively to Trump himself and all of the business is conducted from the same office, using the same employees, as if it was all one company, then the structure might be entirely ineffective. Basically, the actual efficacy of the structure is outside the scope of my posts.

slugsworth

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Re: Trump Organizational Structure: Why is it set up this way?
« Reply #4 on: August 02, 2015, 09:55:46 PM »
I don't know for sure, but in some real estate transactions the llc is taxed as a partnership and the manager member is used to preserve control in the partnership and may even be the entity that developed the project. As the developer, it may have been paid a developer fee by the llc. The investor member may contain the limited partner shares that 3rd party investors own.

Without seeing the operating agreement, we'll all be shooting in the dark.

krishnamba

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Re: Trump Organizational Structure: Why is it set up this way?
« Reply #5 on: August 05, 2015, 02:36:47 PM »
I actually learned some of this from real estate course.

LLC - flipping or any high expense company pass money to s-corp-> do not offer benefits to employees
S-corp - takes 100% money offer benefits to wife,husband and children(employees not owners),
                1. each get a salary k-1 distribution(no fica) ex: 100k profit 30k salary 70k k1 distribution
                 2. do a self directed solo401k and expense 50k an employee (100k couple in one account many plusses), self directed you can buy rental property
                 3. hsa can also be self directed for real estate
                  3. also contribute pension plan to wife, husband and children(use pics of child on website and say its modeling)
                  4. owners will be different trusts
                   5. buy expensive cars(collectors) and lease to s-corp from different company (depreciate these expensive cars)

"own nothing control everything"


tooqk4u22

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Re: Trump Organizational Structure: Why is it set up this way?
« Reply #6 on: August 06, 2015, 02:46:58 PM »
LLC's are sort of a hybrid between a partnership and corporation. 

Like partnerships, LLC's require a managing member (typically the 1%) and the 99% is really the owner of the assets/investments.  It shiels the owners/partners from various liabily but also provides tax benefits that corps don't allow for.  It is a very common form of ownership for real estate investments.