Uniform Audit and Accounting Guide: For Audits of Transportation Consultants’ Indirect Cost Rates
A controlling owner in this situation could extract wealth from the firm,
receive the entire benefit, but only bear a fraction of the cost. We offer a simple
pyramidal structure to illustrate this point. An entrepreneur owns 25% of the stock in
publicly traded Firm A, which in turn owns 32% of the stock in Firm B. In the most
modest scenario, we note that the entrepreneur controls 25% of Firm B -- the weakest
link in the chain of voting rights. At the same time, the entrepreneur owns about 8% of
the cash flow rights of Firm B, the product of the two ownership stakes...
