Valuing Pass-Through Entities

Chapter 12Discounts, Premiums, Bylaws, and State Laws

APTE ownership interest conveys certain rights and benefits to the holder. The degree of control that the holder of a PTE ownership interest can exercise has a substantial impact on the value of the ownership interest. Similarly, the greater the ease and speed with which a PTE ownership interest can be sold without risk of loss, the greater its value. These two issues—control and marketability—have been discussed at length in other treatises. Although a detailed and comprehensive discussion and analysis of the various factors impacting discounts for lack of control (control premiums) and discounts for lack of marketability (marketability premiums) are beyond the scope of this text, noted ahead are certain discount/premium issues that specifically impact PTEs.

PTE Agreements

A PTE, like a C corporation, typically defines the rights and responsibilities of all owners of the subject company in an agreement. Such agreements for LLCs, partnerships, and S corporations are referred to as members' agreements, partnership agreements, and shareholders' agreements, respectively. Additional terms and provisions governing the rights and responsibilities of the company and its owners can be found in governing bylaws.

PTE owners have certain voting rights that are defined in the provisions of such agreements. Depending on the agreement, a supermajority (often defined as more than 75% of the voting interests) or a majority (more than 50%) ...