Is there a tax liability for reverse vesting founder stock/units?
A friend and I formed an Oregon LLC in 2008 for an online business. Now we're up and running and both working on it full-time. Now we've both moved to Texas and want to re-form as a Texas company instead of remaining an Oregon LLC and paying foreign entity fees.
We originally valued the company at $100 and as each put in $50 back when we had nothing but an idea. Today we have a working product and users and the valuation of the company, however we determine it, will surely be higher than $100. I also think it might be a good idea, upon re-forming in Texas, to add in reverse vesting, since we want to look for investors.
How is this going to work? If we valued the company at, say $100,000 today upon re-forming in Texas, would we really have to pay $50,000 each or grant it to ourselves free and count it as income tax? Even if we're the founders?
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Maybe the original was a little more detailed than I expected. Let me simplify: Imagine a partner and I start a company, divided into 1,000 ownership units, and each buy in for $50 for 500 units with reverse vesting. That's 10 cents a unit. If we feel that the fair market price is 50 cents a unit (i.e. that's what we'd sell to an investor for), have we already created phantom income for ourselves, liable for income tax immediately under 83(b) election? Or is this somehow different because we formed the company ourselves, as opposed to being given restrict stock by someone else? – Sean 13 years ago
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This question would be better handled by an accountant, and I highly recommend you get one. The main reasons are that there will be good will and IP that are difficult to value, and you need to be sure that you aren't seen as trying to evade a potential tax liability. Even though they have no book value (i.e. you haven't sold the company) the truth is that they still have *some* value, and transferring the assets from the old to the new company could screw you over. – Joseph Fung 13 years ago
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The Oregon SOS says that if we don't pay the yearly fee by the end of July, they'll dissolve the company. If it's dissolved in that way, and we forma new company in Texas, would it still be "transferring assets"? (Let me guess: Talk to a professional?) – Sean 13 years ago
2 Answers
The main problem I see is how you transfer the assets of the first company into the new one.
Technically, when you create the new company, it contains nothing, so it's worth nothing. If you want to, you can again each put $50, that would work just fine. But the next step should be to transfer the assets (customers, product) from the old to the new. That's when you absolutely need to talk to a professional.
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The old company hasn't made any money, all it has is the software we've developed and IOUs written to ourselves (the founders). Does that make it easier? – Sean 13 years ago
How much you value the company has nothing to do with tax until you sold it. Just look at your income statement for tax purpose. Your stock valuation is not there.
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Thanks. Can you see my edit above for clarification? – Sean 13 years ago
