In a typical setup of a business organization, there is usually a common understanding between investors and founders. The primary obstacle they encounter relates to the taxation of the formation procedure itself. This happens before any income is generated, and the potential tax ramifications might take unaware individuals by surprise.

An investor contributing cash to the corporation does not create a taxable event. The founders receiving shares in exchange for their past, present, or future services are.

Example 1:

Investor contributes $500,000 for 20% of the common stock, the founders get 80% of the stock for their future services and recognize

$2mil in ordinary income (500/20% is $2.5mil post-money valuation, 80% of that is $2mil).

It is not uncommon for many founders to arrive at the table with an IP (Intellectual Property) and/ or know-how, possibly even an existing business. Any property contributed to the corporation is also taxable unless at least 80% of the corporate stock is acquired in that transaction by all the shareholders who contribute property, money, and services (in the case of the services, the contributors of services must have contributed a value in money or property of 10% or more percent of their total contribution). Read more

Ask a question

Data security and privacy are our topmost priorities. Your personal details will not be shared publicly.

Required fields are marked *