Regardless of business form (C Corp, S Corp, LLC
, etc.), if a shareholder
does not contribute cash or property in exchange for his or her interest, then that person will receive taxable income for his or her share of ownership. The reason for this is that the shareholder who invests cash will have diluted his or her share ownership by distributing it to the non-contributing owner. Example:
A contributes $5,000 and receives 50 shares of the business. B contributes $0 and receives 50 shares. A's shares would have been worth $100 per share had B received no shares. But, because B receives 50 shares, A's shares are only worth $2,500 -- as are B's shares. The result is that B has a $2,500 gain from the transaction, because he paid nothing for his 50 shares.
The only practical means of creating ownership without an immediate tax liability for your "partner" is to create an agreement under which B is granted options to purchase shares of the business by some future date. Then, B can save some of his earnings from the business, and when the time is right, he can exercise the options by putting that money back into the business, and receiving shares in exchange for the predetermined price.
This can be done with any business form. If it's done with a corporation
, it's easy, because corporations
use stock certificates to evidence ownership. With an LLC, you would need an operating agreement
that simply grants
the noncontributing partner the right to make a specific contribution to the LLC at some future date, in exchange for a certain percentage ownership.
That about covers the issue. Please let me know if I can be of further assistance.
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