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I created a California s-Corp and did a friends and family

stock offering. I am going...
I created a California s-Corp and did a friends and family stock offering. I am going to sell off 200 thousand shares of 10 million. What is the best way to do this to limit my tax liability?
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Answered in 15 minutes by:
11/3/2012
socrateaser
socrateaser, Attorney
Category: Business Law
Satisfied Customers: 39,354
Experience: Retired (mostly)
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Do you mean to issue shares from the corporation to investors for the purposes of adding capital to your organization? Or, are you planning to sell shares that you personally hold to third parties, and retain the proceeds for yourself?

Thanks in advance.

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Customer reply replied 5 years ago

Yes, to issue shares from the corporation to investors. And yes to add capital to my s-corp.


 


Thanks!

Then, you won't owe any income taxes on the invested capital, because capital investment is not income. IRC 1032 (no gain or loss on exchange of money for corporation stock).

I'd like to give you a big long complicated answer for this, but it's cut and dried. You don't have any tax issues concerning the receipt of capital investments to the corporation.

If you distribute the investment capital to yourself for personal use, then that would be ordinary taxable income to you. But, it would also likely be investment fraud, so it's probably not a great idea.

Hope this helps.
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Customer reply replied 5 years ago

Thank you. I have one last question. Does the same IRC 1032 still apply to the 9 million 800 thousand shares that the s-corp "owns."Meaning there is no value to them at this time nor has there been an exchange of money for them.So, the IRS won't look at it as taxable? That will be it and I will give you a great rating after this last question :)


 


Thanks.


 

If the shares were authorized when the corporation was originally formed, but are issued, then they are just paper without any value. Once issued, they take on the proportionate value of the corporation's equity (Assets - Liabilities = Equity). But there is no taxable gain or loss on a share unless it is sold after original issuance by the corporation.

Hope this helps.
socrateaser
socrateaser, Attorney
Category: Business Law
Satisfied Customers: 39,354
Experience: Retired (mostly)
Verified
socrateaser and 87 other Business Law Specialists are ready to help you
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Customer reply replied 5 years ago

I have some more in depth questions. If I sign up for the free trial can I ask them. They are very similar.

Of course. That's what the subscription plan is best used for, in my opinion.

Just be sure to put my userid ("Socrateaser") at the beginning of your question -- otherwise, the person who answers each of your questions is chosen at random.

Please do not reply to this note -- otherwise the system will attempt to bill you again, outside of the subscription plan.

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Customer reply replied 5 years ago

Socrateaser


 


I signed up for the monthly service! My business partner had more detailed questions of the above. Can you let me know if my questions make sense. I have added specific details which I think will help you better answer the questions.


 


Questions for correct structuring of Live Right Wellness Centers™ (LRWC)



On 5/21/12 LRWC incorporated to an S-Corp. We used form 2553 and on Part I (number of stock owned/%ownership) we designated 5,000 each to two principles of LRWC.


 


On 5/21/12 we also used form ARTS-GS Articles of Incorporation of General Stock. On box # XXXXX we designated the total # XXXXX shares which the corporation is authorized to issue as 10,000.


 


Then on 7/13/12 we filled out The Unanimous Written Consent in Lieu of First Meeting of the Board of Directors. The # XXXXX shares was set at 5,000 @$100 for each principle. A .001 value.


 


Then on 7/18/12 we filled out The Unanimous Written Consent in Lieu of First Meeting of the Board of Directors as an addendum to the above. The # XXXXX shares was set at 5,000,000 @$25,000 for each principle


 


Then on 7/21/12 we filled out a Certificate of Amendment of the Articles of Incorporation changing the number of shares to 10,000,00.


 


We then sold 200,000 shares at $1 per share to20 investors at 10,000 shares each.


 


The following was the agreement:


 


CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM ONE


 


Up to 1,000,000 Shares of Common Stock at $1.00 per share


Maximum Offering - 200,000 Shares


Minimum Offering - 10,000 Shares


Minimum Purchase Per Investor- 10,000 Shares at a $1.00 per Share


 


This Confidential Private Placement Memorandum (the "Memorandum") has been prepared in connection with an offering (the "Offering") of up to 1,000,000 shares of Common Stock, $1.00 par value (the "Shares") of Live Right Wellness Centers (the "Company"). The minimum offering amount is 10,000 ("Minimum Offering Amount"), and the maximum offering amount is 200,000 ("Maximum Offering Amount"). The minimum purchase per investor is 10,000 shares, or $10,000.00. Officers and directors of the Company will make offers and sales of the Shares; however, the Company retains the right to utilize any broker-dealers registered with the National Association of Securities Dealers, Inc. ("NASD") and applicable state securities authorities to sell all or any portion of the Shares. If the Company so elects, it may pay such broker-dealers a commission in the amount of up to 10% and a non-accountable expense allowance of up to 3% of the proceeds they have sold.



The following table sets forth certain information, as of September 7, 2012 and as adjusted to give effect to the Offering, regarding the beneficial ownership of the Common Stock by (i) each beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii) each director of the Company, and each executive officer of the Company, and (iii) by all executive officers, directors of the Company as a group.




Principle 1: 5,000,000


Principle 2: 5,000,000





We now have 9 million 800 thousand shares left.



Here are our question in regards XXXXX XXXXX above.




  1. The shares sold off were for capitalization of the business only. It was not for principal gain. Does a certain amount of shares need to be designated for the sale of stock in the corporate business minutes or anywhere else like the state or IRS?

  2. What should be done with the remaining 9 million 800 thousand shares that has a 50/50% ownership of the LRWC and its principals? Does the corporate minutes need to reflect any value or authorization of remaining stock?

  3. What is the best way to limit any tax liability of stock sold and remaining stock?

  4. Is the stock sold to investors taxable?

  5. When additional stock is sold off does that represent a % ownership in the corporation or only the value of the stock?

  6. Is the value of the stock prior to being sold a reflection of the corporate minutes, the stock offering agreement, or both? How is the value of the stock determined once it is sold?


 


 

You need to open a new Q&A session. Otherwise, your subscription plan will not cover the new question.
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Customer reply replied 5 years ago

Ok, I just sent.

I do not see a new question.

Please do not reply to this memo. It will reopen this Q&A and require me to respond again. Just open a new Q&A session with the same information. Thanks.
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socrateaser
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