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Hi - We just incorporated our company as a C Corp. in Delaware.

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We sent in our 83...
Hi - We just incorporated our company as a C Corp. in Delaware. We sent in our 83 (b) election with the Fair Market Value indicated as $1.50. This is the total value of 150,000 shares that each of us received. However, we are now concerned that the IRS might mis-understand this as per share value which would cause us significant tax liability. Is there such a risk of misinterpretation. If yes, what is the remedial action?
Submitted: 8 years ago.Category: Legal
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6/17/2010
Lawyer: Richard - Bizlaw, Attorney replied 8 years ago
Richard - Bizlaw
Category: Legal
Satisfied Customers: 10,841
Experience: 30 years experience corporate, litigation, international
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Are you one of the founders of the company? Was this stock an award in lieu of compensation or was it issued as part of your initial capitalization of the company?
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Customer reply replied 8 years ago
I am one of the founders and this was part of the initial capitalization of the company.
Lawyer: Richard - Bizlaw, Attorney replied 8 years ago

You should revoke the 83(b) election as it is not applicable to you. Do this by writing a letter to the IRS and sending it where you sent the election form. Better yet, call the IRS and let them tell you where to send the revocation.

 

The stock you received is in consideration for the capital you put into the company for your stock. So if you invested $500 and got 150,000 shares of stock with a par value of $0.001 your books of account reflect stock value of $15. plus paid in capital of $485. Your tax basis in the stock is $500. You should check to see if you qualify as 144 stock as that will give you an ordinary loss if you suffer a loss on the stock.

 

You only get into 83(b) issues if you receive stock as compensation and the stock is not vested or subject to forfeiture. You do not have that situation.

 

This communication is not intended as legal advice. A local attorney should always be consulted for legal advice. No client/attorney relationship is intended or created by this communication.

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Customer reply replied 8 years ago
We did receive this stock as initial founding (but no capitalization involved as we did not invest anything in the company). Also there is a vesting schedule - so is the 83 (b) election applicable in this case?
Lawyer: Richard - Bizlaw, Attorney replied 8 years ago

You paid the filing fees to form the corporation. That is an investment. You should scrap the vesting schedule unless you gave some small owners stock as compensation for services and they are the ones you want to be able to take back the stock if they leave. That is really what this election is for. People who are essentially employees and are becoming shareholders because the company does not have the resources to pay them. The people that founded the company, and will be there to the end would generally not take their stock as compensation. How many of the founders fall into the category of those who have to stay in order to vest their shares because there is a chance they will leave, compared to those who started the company and will be there no matter what until it succeeds or fails.

 

This communication is not intended as legal advice. A local attorney should always be consulted for legal advice. No client/attorney relationship is intended or created by this communication.

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Customer reply replied 8 years ago
In my case, I am a co-founder but I am now exiting the company - will no longer work for it, but wish to retain my shares. What would you suggest then?
Customer reply replied 8 years ago
In my case, although I was a co-founder, I am now exiting the company (will no longer work for it). But I wish to retain my initial shares. So does 83 (b) apply to me? See below what the shareholder agreement says:

"Of the 150,000 shares of common stock initially issued to each founder, 15,000 shares shall vest immediately. The remainder shall vest, subject to a , subject to a twelve (12) month cliff vesting period, (i.e., the shareholder must satisfy the vesting conditions outlined below for all twelve (12) months"
Lawyer: Richard - Bizlaw, Attorney replied 8 years ago

If that is the way the shareholder agreement is structured, then it does apply to you. If you just got your shares and you will be forfeiting all but the first 15,000 shares, then you would not want to make the election. The election should be made if you believe there will be a significant appreciation in the stock and there is little chance of forfeiture. The shareholder agreement was obviously to require that the initial investors stay with the company.

 

This communication is not intended as legal advice. A local attorney should always be consulted for legal advice. No client/attorney relationship is intended or created by this communication.

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Customer reply replied 8 years ago
Anyway, assuming that we already made the election, what is our exposure now. Also our question was if the fair market value column would be interpreted as per share value or total value.Tks.
Lawyer: Richard - Bizlaw, Attorney replied 8 years ago

The fair market value would be the value of the number of shares you listed in the property received section. So if you listed the 150,000 shares the value of $1.50 for all the shares.

 

This communication is not intended as legal advice. A local attorney should always be consulted for legal advice. No client/attorney relationship is intended or created by this communication.

 

 

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