There is a meeting of minds between the investors and founders in a typical corporate formation.  One of the first hurdles to overcome is the taxation of that initial step, even before there is any income, the tax consequence may hunt the unwary.

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.  (IRS Regs. §1.351-1(a)(2))

Ex. 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).  Ouch. Read more

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