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Fidelity changes its corporate structure

Conversion to LLC could save millions for firm, boost profits

Boston mutual fund giant Fidelity Investments has changed its corporate structure, a move that could save it hundreds of millions of dollars in taxes and boost profits.

The umbrella company for Fidelity's holdings, a company previously known as FMR Corp., was converted into a limited liability company called FMR LLC, according to a company spokeswoman and recent securities filings.

Under state revenue law, most limited liability companies do not pay corporate taxes. Taxes on their profits are paid directly by the shareholders. In traditional corporations, taxes are paid both by the corporation and by individual shareholders.

Fidelity spokesman Vincent Loporchio wouldn't discuss the motives for the shift in detail except to say: "We believe the LLC is the most advantageous organizational structure from a legal point of view."

Fidelity is one of the state's largest companies, reporting $1.2 billion in profit last year on revenue of $12.8 billion. The company employs about 46,000 people worldwide and about 13,000 in Massachusetts.

The change in Fidelity's corporate structure was first reported yesterday by Bloomberg News. The Boston Globe reported in June the company was in the process of transforming itself into what is known as an "S corporation" organized under subchapter S of Internal Revenue Service rules, giving it a similar tax structure at both the state and federal levels. Like LLCs at the state level, S corporations avoid double taxation by eliminating most corporate tax payments.

Joseph Newpol, a Bentley College taxation professor, said converting the company to an LLC at the state level is a necessary step to becoming an S corporation.

The shift to S corporation status doesn't appear to have happened yet, however, Newpol said, based on an Oct. 15 filing to the Securities and Exchange Commission. It states the new company, FMR LLC, had 449 investors, well over the limit of 100 investors an S corporation may have.

Most S corporations in the United States are smaller companies, but large S corporations are not uncommon, according to specialists. Congress has steadily raised the ceiling on the number of shareholders a private company may have to qualify, with passage of the most recent increase, from 75 to 100, coming in 2004. The Tribune Co., which owns the Los Angeles Times, the Chicago Tribune, and the Chicago Cubs, converted recently.

Loporchio said under the new structure the Johnson family will still own 49 percent of the company, with the remainder in the hands of employees, the same as before. He declined to discuss the potential savings but said the change to an LLC won't have an impact on its mutual funds business, its relationship with clients, or its headquarters location.

Loporchio added, "It's important to note Fidelity intends to remain a private company. We're well capitalized and our liquidity is strong. We believe that being private provides us with the greatest flexibility to reinvest in the business."

The Oct. 15 filing lists the two best-known Johnson family members as holding 10 percent or more voting stock in FMR LLC - the company's 77-year-old chairman, Edward C. "Ned" Johnson III, and 45-year-old Abigail P. Johnson, his daughter and company vice chairwoman.

The new structure could save Fidelity hundreds of millions of dollars in tax payments a year, said Robert Willens, a Lehman Brothers tax specialist in New York. A confidential bond offering obtained by the Globe showed that in 2001, the company set aside $623 million to pay federal and state corporate taxes. Fidelity declined to discuss its payments.

Fidelity's plans have previously raised concerns about its tax contribution in Massachusetts, where S corporations pay a 4.5 percent state tax, compared to the usual 9.5 corporate tax. Anthony DeGregorio, chief counsel for the state Legislature's Joint Committee on Revenue, said the company's size means its effective rate might be higher under state rules that govern the largest S corporations. Most S corporations pay no federal corporate taxes on their profits.

The restructuring is only the latest change underway this year at Fidelity. Edward C. Johnson III has shuffled executives this year and brought in a surprise pick as president, Rodger Lawson. Lawson launched a broad reorganization in September and also has stressed cost controls. This week, the company sent layoff notices to about 200 people, though it has added more than 4,000 jobs worldwide this year.

Ross Kerber can be reached at Globe correspondent Alan Wirzbicki contributed to this report.

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