business tax-law corporate-law equity federal-tax-law
Can a founder &#39;gift&#39; pre-existing assets to a company after hiring a cofounder?
<p>I live in the U.S.  Suppose that I create a company with a deposit of $10,000 and want to bring in a cofounder for an equity stake of 15% in this company.  I have personal assets like computer code, patents, and equipment developed or obtained before founding the company and worth $90,000 in the context of the company.  If I give these to the company before I bring the cofounder on board, then the cofounder must pay income tax on $15,000.  If, however, I hire the cofounder before these are merged into company assets, and then simply give them to the company as a "gift" (without compensation in stock), then the cofounder pays income tax on only $1500 while everything else remains equal.</p>

<p>The question is whether I am able to take the second approach under any conditions, and if so, what these conditions are.  Is there a dependence, for example, on the numbers above, or on the state in which all this takes place?</p>

<p>I assume you will give your tangible and intangible assets to the company in return for stock in the company. Since there is no particular market value to the stock at or near the point of formation the board could decide that your assets were worth 10,000 shares, for example. When the stock was given in return for those assets, no taxable event would occur since you were trading assets worth X for stock worth exactly X. A company could trade stock for tangible and intangible assets at any point in its existence. </p>

<p>If the new co-founder is not paying "market value" for his/her shares, then they are getting something of value  and would need to pay tax on that. I think you are trying to keep that amount low so you would like to do it while the company is worth less. After the assets are transferred to the company it will be worth more. The issue is, will you trade your assets for more stock that the 85% you currently have. If so you will have numerically more shares and the co-founder will have less than 15%. One solution is to figure it out in advance and give the co-founder a large % initially that is then diluted to 15% after you trade stock for your assets.</p>

<p>Based on the edit yo the question - the value of your IP is hard to determine as is the value of the company right after founding. If you provide the IP to the company for 5% of the company (kind of donating) there is no way to say that us not a fair trade.</p>

<p>If you screw up how stock is issued at this point it may be very difficult to ever raise money from professional sources or go public in the future.</p>

<p>The short answer is that there is no difference, for tax purposes, in the consequences of transferring the assets to the company before or after a 15% interest is issued to the co-founder. </p>

<p>There is no such thing as a "gift" to a company; the transfer is a capital contribution by one shareholder/member (depending on the organizational form of the company)  to the company. The other shareholder/member gets the benefit of the value of the capital contribution (15% of $90,000, in your example). </p>

<p>Depending on the circumstances, that benefit is probably going to be treated as compensation income to the co-founder, just like the 15% of the initial $10,000. If it's any consolation, the company should be entitled to a $15,000 deduction for compensation expenses. If it's an LLC, the co-founder should get the benefit of 15% of that deduction and that should help reduce some of his tax liability.</p>
