1. Free Legal Help, Legal Forms and Lawyers. TheLaw.com has been providing free legal assistance online since 1995. Our most popular destinations for legal help are below. It only takes a minute to join our legal community!

    Dismiss Notice

Share distribution

Discussion in 'Starting a Business, Incorporation' started by scream loud, Jun 20, 2020.

  1. scream loud

    scream loud Law Topic Starter New Member

    Messages:
    6
    Likes Received:
    0
    Trophy Points:
    1
    Jurisdiction:
    Delaware
    Hello,

    A C corp was registered under one owner who owns all the shares.
    This owner would like to give 40% to a friend.
    How can the process of giving 40% of the shares be done? How can she set conditions for this transfer, for example that friend needs to commit at least 4 years to the company. Or that these 40% cannot be re-sold for non-existing share holders.
    Is the friend considered a founder? Is there a need for a founders agreement?

    Thanks
     
  2. army judge

    army judge Super Moderator

    Messages:
    32,491
    Likes Received:
    4,949
    Trophy Points:
    113

    She needs to hire an attorney.
    Her wishes are far too complex for a discussion site.
     
    hrforme likes this.
  3. Tax Counsel

    Tax Counsel Well-Known Member

    Messages:
    1,163
    Likes Received:
    591
    Trophy Points:
    113

    There are several ways that it may be done. Which one is best for the owner will depend on the specific circumstances. For example, she could simply give directly 40% of her shares to the friend, and have that transfer recorded in the company's share register. Or the company might issue new shares to the friend.

    Again, several ways to do it. For example, instead of giving 40% of the common stock (which would also give the friend voting rights, etc) the owner could give the friend a different class of stock that is restricted or has different rights than the common shares. Or the stock shares could be issued with a transfer restriction.

    No, the friend is not a founder and there is nothing particularly special about being a "founder". That term just indicates who the persons were that started the company. That said, anytime you have more than one person as an owner of a closely held corporation it is highly recommended that the corporate charter and by-laws be well drafted to outline how the company will operate and that there also be a shareholder agreement that clarifies how things will work between the shareholders.

    Note that depending on the value of the shares given as a gift the owner may need to file a federal gift tax return.

    The owner may wish to consult a business attorney and tax professional about all this.
     
    scream loud likes this.
  4. adjusterjack

    adjusterjack Super Moderator

    Messages:
    8,109
    Likes Received:
    2,206
    Trophy Points:
    113

    Why? Why? Why?

    Is there a romance involved?

    I predict that the arrangement will ultimately lead to disaster.
     
    army judge and scream loud like this.
  5. scream loud

    scream loud Law Topic Starter New Member

    Messages:
    6
    Likes Received:
    0
    Trophy Points:
    1
    @Tax Counsel thanks a lot, your answer is kind and helpful. I thought that share transfer would need a specific procedure with the authorities. But now I understand that it can be done internally and record it in the share register.
    I believe that the share par value was set to 0.01$, so the total transaction will be around 5$ (no need for federal gift tax return i assume).

    Do you happen to know a good concise reference I can read about c corporations and such basic details that I completely ignore?

    @adjusterjack No romance, they built the idea together, and agreed on the distribution of %. However they went DIY on the corp formation, and did not know at what point should the distribution be made. The C corp ended up being created with only one owner holding 100%. Now she wants to give the 40% while making sure that this friend will keep on working and help the company. So she's trying to find out how to do that (I am supposed to be the business advisor in that case - we're a group of noobs as you can see).
     
  6. adjusterjack

    adjusterjack Super Moderator

    Messages:
    8,109
    Likes Received:
    2,206
    Trophy Points:
    113

    There's the problem. It's easy enough to give 40% of the shares to the friend. It's not so easy to get the shares back if the friend slacks off or leaves the business.

    Understand that once you GIVE something to a person, that person OWNS it and doesn't have to give it back. If there was a breach of the agreement it would take big bucks worth of litigation to enforce the agreement and get the shares back.

    An alternative is a written agreement giving the friend 40% of the profits as long as the friend is actively working in the business as agreed.

    Whatever method you choose, the written agreement should be created by a business attorney who can warn you about all the things that can go wrong.
     
    scream loud likes this.
  7. Tax Counsel

    Tax Counsel Well-Known Member

    Messages:
    1,163
    Likes Received:
    591
    Trophy Points:
    113

    Par value is meaningless under tax law. What matters is the actual value of the shares. For a closely held company, if you make a gift of 40% of the common shares to someone else you are giving them 40% of the company value. So your gift is 40% of the entire company value, with some discount for the fact that the donee will not have controlling interest in the company (called a minority discount). So, for example, if the value of the company is $100,000 then the value of 40% of the shares is going to be about $40,000. Since that exceeds the annual gift tax exclusion for total gifts made during the year to any one person a gift tax return would then be required if it was truly a gift.

    However, your new information suggests that the friend was part of the company from the start and that the deal always was that she get 40%. In that case, there is no gift. You are simply allocating to her what she should have had if you'd organized it properly from the get go. This affects how you will get her the shares.


    Understand that the term "C corporation" is a tax term. There are two ways the income of a corporation is taxed by the federal government. S-corporations are corporations that elect to be taxed under Subchapter S of the Internal Revenue Code (IRC). Those rules are very similar to the taxation of partnerships. A C corporation is any corporation that has not made the S corporation election. Under state corporate law, the entity is just a corporation (or whatever other kind of entity was formed — LLC, LLP, etc). So if this is organized as a corporation under Delaware law it is just a corporation like any other. State corporate law does not distinguish between C and S corporations.

    There are entire treatises just on the taxation of C corporations that are incredibly detailed. Similarly there are treatises on state corporate law, too. Those extensive treatises probably have more details than you need to know. What you probably should have is a corporate law attorney you can consult for advice on the rules the corporation must follow and how best to run the corporation from a legal standpoint. And, of course, you should have a tax professional familiar with taxation of C-corporations (tax attorney, CPA, or enrolled agent) advising the on the tax issues.
     
    scream loud likes this.
  8. scream loud

    scream loud Law Topic Starter New Member

    Messages:
    6
    Likes Received:
    0
    Trophy Points:
    1
    The value of the company is still nothing. There is not capital, nor assets. Only an idea that is being developed.

    Thank you so much everyone for your help. I'll try to find a simplified book about corporations and required yearly actions so I would be able to eventually ask the correct questions if I hire a lawyer, and not waste valuable time!
     
  9. zddoodah

    zddoodah Well-Known Member

    Messages:
    4,071
    Likes Received:
    996
    Trophy Points:
    113

    Among other things, he could find a nice box and put the shares in the box and wrap it with gift wrapping paper. A bow would be nice. If your intent was to ask whether there's some legally required formal process, the answer is no.

    A contract.

    Considered by whom? Please define "founder."

    I don't know.

    You understand there's a difference between being a shareholder and being an employee, right? One can be a shareholder without being an employee (and vice versa) or one could be both.

    Might be a good idea for the owner of this corporation to hire someone who knows what he's doing.

    Sure it is -- if it's done properly up front.
     
  10. scream loud

    scream loud Law Topic Starter New Member

    Messages:
    6
    Likes Received:
    0
    Trophy Points:
    1
    Hello,

    We are a new C corp in Delaware and we need to pay a contractor from europe for a website design.
    Do we need to withhold any taxes or fill specific forms? Is there anything particular to pay attention to?

    Thanks
     
  11. army judge

    army judge Super Moderator

    Messages:
    32,491
    Likes Received:
    4,949
    Trophy Points:
    113


    Europe is sixth on the list of continents in size, covering 3,800,000 square miles.

    Europe is he third most populous continent with 746,000,000 people.

    Some of the nations on the continent belong to the EU, and some don't.

    That said, it might help to name the country your contractor calls home.

    It is probably best if you speak to your corporate lawyer and/or CPA regarding what taxes must be withheld (if any) and what else might be required if you retain the services of the person.
     
  12. zddoodah

    zddoodah Well-Known Member

    Messages:
    4,071
    Likes Received:
    996
    Trophy Points:
    113

    No, you're not. You might be a shareholder and/or a director and/or an officer and/or an employee of a corporation, but you are not a corporation.

    If he's an independent contractor and not an employee, there are no tax withholding requirements.

    Yes. Lots of things.

    As I suggested three weeks ago, if the folks running this company don't know what they're doing,
    they should hire someone who does.
     
    hrforme and scream loud like this.
  13. Tax Counsel

    Tax Counsel Well-Known Member

    Messages:
    1,163
    Likes Received:
    591
    Trophy Points:
    113

    Assuming the contractor is located in Europe, is not a U.S. citizen or resident, and does all of the work there then the answer is that you don't have to do any U.S. withholding or file any 1099 or other information returns with the IRS either. If the situation is different from that (e.g the person is doing the work for you in the U.S., the person is a U.S. citizen/resident, etc) that may change the answer.

    You might have tax obligations with the country the person is working in, however.
     
    hrforme and scream loud like this.
  14. scream loud

    scream loud Law Topic Starter New Member

    Messages:
    6
    Likes Received:
    0
    Trophy Points:
    1
    @army judge Thanks a lot for the geography lesson. By Europe I meant EU yes. Iforgot that I had to be very careful and precise around lawyers.

    @zddoodah You're right about the first point, my bad. Thanks for the second point. Well for the thrid point, we are trying to bootstrap this and DIY style just for the beginning. You are right though, and we know that, this is why we're trying to be careful and to learn the process.

    @Tax Counsel Thanks a lot for the very clear and informative answer as usual. Yes the contractor is located and does the work in Europe, and he's not a US citizen nor resident.

    Thanks a lot everyone!

    PS: does anyone know why this post was moved? I originally tried to follow the forum rules "(a) Post in the appropriate forum topic: ", so I tried to post it under "employment", but I got a ban warning asking me to always post in this thread from now on.
     
  15. Tax Counsel

    Tax Counsel Well-Known Member

    Messages:
    1,163
    Likes Received:
    591
    Trophy Points:
    113

  16. PayrollHRGuy

    PayrollHRGuy Well-Known Member

    Messages:
    1,039
    Likes Received:
    509
    Trophy Points:
    113

    army judge likes this.
  17. army judge

    army judge Super Moderator

    Messages:
    32,491
    Likes Received:
    4,949
    Trophy Points:
    113


    BINGO!
    JACKPOT WINNER!
     
  18. scream loud

    scream loud Law Topic Starter New Member

    Messages:
    6
    Likes Received:
    0
    Trophy Points:
    1
    Well if this is the reason, it is totally unjustified to mention "last warning or you will be banned"...
    I never had any other warnings, I was following the rules and logic, no need for this aggressiveness.

    Anyway, thanks everybody!
     

Share This Page