My own corporation's stock

Don Quixote de la Mancha quixote at dulcineatech.com
Tue Oct 27 14:55:27 EDT 2009


On Tue, Oct 27, 2009 at 10:19 AM, Anthony <gnucash at inbox.org> wrote:
> The IRS wants you to use fair market value.  If the company could just
> set its own price, it'd set the price at $0.01, and avoid 99% (or
> more) of payroll taxes.

In my particular case a lower share price wouldn't change the payroll
tax we would have to pay.  If the shares cost less then I would have
to issue more of them, because everyone's pay would be for a specific
dollar amount.

> Determining the fair market value of the stock of a privately-held
> company is hard.  You'll say one thing, the IRS will say another
> thing, and you'll wind up just paying off the IRS because it's more
> expensive to fight it than it is to pay it.  And if your accountant
> has any sense of ethics, s/he's going to force you to come up with a
> reasonable fair market value before you file your return, which in
> itself is going to be expensive.

That's a good point.

Would a company's fair market value depend in any way on its
potential, and not just what it has actually accomplished?

I have ideas for quite a few software products, some of which might
turn out to be very valuable someday.  But I'm the only software
engineer, so it's going to take me a long time to actually create all
those products.

If the IRS were to claim that my company's value included the mere
existence of those ideas, I would have quite a big problem.

> You don't mention if the stock is going to be restricted or not, but
> that's a big factor as well.  You don't mention whether or not the
> stock is going to be a separate class.  That's a factor.  You don't
> mention whether you are interested in electing to be taxed as an
> S-corporation.  Another factor.

There is just one class of common stock.  The reason given by Mancuso
in his incorporation book is that issuing stock in any but the
simplest manner requires filing a form with the State of California,
accompanied by a very sizable fee - in the thousands of dollars.

I would be an S-corporation, but one of the stockholders lives in
England.  A company is only allowed to be an S-corporation if 95% of
the stock is held by US residents.

> And on the non-IRS side of things, there are all kinds of legal issues
> that come into play when you have more than one shareholder, which
> I'll just leave at that as it's not my area of expertise.

I will look into that.

> If you're willing to pay your employees and directors in IOUs
> denominated in dollars rather than outright stock (or promises of
> stock), that would be easier to account for.  They can always choose
> to buy stock with the IOUs later, after you've set things up for that.
>  But this may or may not be your decision - it's a business decision
> and not an accounting decision - it just happens to make the
> accounting a lot easier :).

That's a good idea.  I'll bring it up with my associates, hopefully
they will be OK with it.

Thanks for your help,

Mike
-- 
Don Quixote de la Mancha
quixote at dulcineatech.com
http://www.dulcineatech.com

   Dulcinea Technologies Corporation: Software of Elegance and Beauty.


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