Discussion:Stock basis in privately held company
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Discussion Forum Index --> Tax Questions --> Stock basis in privately held company
| 27 September 2006 | |
| Client starts a C corporation with $500k of equity investment and $500k of loans. 30,000,000 shares of $.001 par value common stock authorized - 9,020,000 issued. Founder owns 9,000,000 shares and an investor owns 20,000 shares which the investor paid $2.50 per share for.
1. What is founder's basis in the 9,000,000 shares? 2. How is the founder's stock recorded on the balance sheet? | |
Michaelstar (talk|edits) said: | 27 September 2006 |
| Founder's basis is equal to what he paid which equals $500k. The accounting entry you want to make is: credit - Common stock - $90,000, paid in capital - $410,000, debit - cash - $500k. The accounting entry for the investor is: credit - Common stock - $200, paid in capital - $49,800, debit - cash - $50k. His basis is the $50k he paid. Loans do not add to basis for a C corp. | |
Janakpatel (talk|edits) said: | 27 September 2006 |
| Excellent explanation Michaelstar | |
| 28 September 2006 | |
| Just to make sure I'm not misunderstanding, for the founder it should be 9,000 and 491,000; not 90,000 and 410,000 right? 9M shares x .001 = 9,000. Thanks again. | |
Michaelstar (talk|edits) said: | 28 September 2006 |
| YES your correct. My eyes are getting bad. Did not originally see that as .001 but saw it as .01. Guess the .01 is also how I might have expected to see it read as well. My bad! Theory was at least correct. That also makes the investor $20 and $49,980. | |
| 28 June 2007 | |
| Can I revive this thread to ask another related question on balance sheet postings? I'm setting up the books for a new S-Corp which has three shareholders. Stock is a no par value stock. SH-A initially put in $100.00 to open the bank account - the corp didn't really begin operations for another six months. At that time, SH-A added another $55,675, while SH-B put in $18,800 and SH-C put in $100,000. The ownership % is SH-A 65.5%, SH-B 22%, SH-C 12.5%. I'm curious about the initial $100.00 entry to open the account as I'm not sure how to deal w/ stock with no par value. Does this mean that the SHs can purchase the "unissued" shares for any amount since it doesn't have a par value? Any thoughts on how I should allocate the original $100.00 "opening balance" contribution from SH-A? I thought that I would treat all of the additional cash ($55,675, $18,800, $100,000) additions to the company as Shareholder loans.
Thanks for the insight as this is a new situation for me re: booking initial opening balances. | |
| June 28, 2007 | |
| You've got more work than you think. For your ownership is ONLY defined by the capital contributions of the shareholders. Period. You cannot define them by agreement, as in a partnership. So A has put in 55,775, B 18,800, and C 100k. Total capitalization is 174,575, making A 32%, B 11%, and C 57%. That isn't what you want. Can you jiggle the cash entries between stock and loans? Not according to Sec. 351 unless you're in the Ninth Circuit, or unless some time has passed between inital cap and the loans coming in, like several months. Soooo....don't know how to help you at this point. | |
| 28 June 2007 | |
| JR1 - the initial $100.00 funding (opening of bank account) from A occurred 8 months prior to the additional large injections of cash, which we could classify as SH loans, right? Could one state that the initial $100.00 from A was in fact an initial capitalization on behalf of all three SHs for the stock issuance and that B & C owe A for their $22.00 & 12.50 initial contributions? | |
| 28 June 2007 | |
| If stock was never issued. I'd reclass them all as shareholder loans to the corporation. have 3 of them sit down and work out the capital numbers then reclass them to Common stock and Paid in Capital. | |
| June 28, 2007 | |
| I don't know, Jdr...seems a bit aggressive to me, given the size of the next round of cash infusion. Is the $100 legit as the opening stock? As Pegoo asks, did the stock really get issued? I'd chat with a knowledgeable attorney on this one. The risk is high, in that if IRS disagrees, your allocations will be all wrong. If you're in the Ninth Circuit you'd be golden, given the Perrachi decision. You could probably bifurcate (love to use that word) the infusions between stock and notes, but no other courts have followed that, and I'd be surprised if it wasn't overturned at some point since it doesn't seem to abide by the spirit of 351. Actually, do you even have to follow 351? Only cash came in, so there's no issue about FMV/basis recognition. That might be an avenue. Oh, wait, but you have recognition by the corp on the debt received maybe...I dunno, just talking out loud. | |
| 28 June 2007 | |
| Can I ask a related question?----Do the shareholders of a closely held corporation really have to have the physical stock certificates of their Coporation? | |
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