6 ms·

When it is time for fundraising, is it possible to just create a new C-Corp, then sell the assets of the LLC to the C-Corp? Are there major tax implications? Is

by kcdev 10y ago

When it is time for fundraising, is it possible to just create a new C-Corp, then sell the assets of the LLC to the C-Corp? Are there major tax implications? Is it possible to sell the assets for a $1? Or would that be in violation of some tax rule?

edoceo 10y ago
It's easy. Or the C-Corp owns the LLC, or IP assignment. Just move the assets over, not an actual sale.
tedunangst 10y ago
If you buy something for less than it's worth, you have to book the difference as income. Not much difference between buying $1000 widget for $1 and buying it for $1000 and then getting paid $999.
jasode 10y ago
As one example, the first Facebook business entity was a Florida LLC. Mark Zuckerberg then created a new Delaware based C-Corp that bought the IP from the LLC. I believe the original trigger for converting to a C-Corp was the Peter Thiel investment.
uiri 10y ago
No cash is needed to sell the assets or LLC to the C Corp. Most likely, you would sell the assets of the LLC to the C Corp in exchange for some number of shares (valued at the pre-money valuation of the company) and then issue additional shares equal to the VC money such that the total value of the new C Corp is the post-money valuation. Afterwards, the founders can distribute the shares and wind up the LLC. The alternative is for the founders to sell the LLC to the C Corp for shares and then the C Corp can wind up the LLC.
- nthj 10y ago
  I'm asking out of curiosity (e.g. I have no need to pay a lawyer or CPA to answer this): Would the founders have to potentially, or always, pay taxes on the conversion? Seems like the sale of the LLC or the assets could be recognizable gain.
  - uiri 10y ago
    It seems like it would qualify under the rules of an Other Nontaxable Exchange - Property Exchanged for Stock.[0] I think there are enough cases like this and the IRS rules are sufficiently clear that it will be possible to structure the VC investment in a way that eliminates any tax liability on the conversion. [0] https://www.irs.gov/publications/p544/ch01.html#en_US_2016_publink100072449 https://www.irs.gov/publications/p544/ch01.html#en_US_2016_p...

by kcdev 10y ago

edoceo 10y ago

It's easy. Or the C-Corp owns the LLC, or IP assignment. Just move the assets over, not an actual sale.

tedunangst 10y ago

If you buy something for less than it's worth, you have to book the difference as income. Not much difference between buying $1000 widget for $1 and buying it for $1000 and then getting paid $999.

jasode 10y ago

As one example, the first Facebook business entity was a Florida LLC. Mark Zuckerberg then created a new Delaware based C-Corp that bought the IP from the LLC. I believe the original trigger for converting to a C-Corp was the Peter Thiel investment.

uiri 10y ago

No cash is needed to sell the assets or LLC to the C Corp. Most likely, you would sell the assets of the LLC to the C Corp in exchange for some number of shares (valued at the pre-money valuation of the company) and then issue additional shares equal to the VC money such that the total value of the new C Corp is the post-money valuation. Afterwards, the founders can distribute the shares and wind up the LLC. The alternative is for the founders to sell the LLC to the C Corp for shares and then the C Corp can wind up the LLC.

nthj 10y ago
I'm asking out of curiosity (e.g. I have no need to pay a lawyer or CPA to answer this): Would the founders have to potentially, or always, pay taxes on the conversion? Seems like the sale of the LLC or the assets could be recognizable gain.
- uiri 10y ago
  It seems like it would qualify under the rules of an Other Nontaxable Exchange - Property Exchanged for Stock.[0] I think there are enough cases like this and the IRS rules are sufficiently clear that it will be possible to structure the VC investment in a way that eliminates any tax liability on the conversion. [0] https://www.irs.gov/publications/p544/ch01.html#en_US_2016_publink100072449 https://www.irs.gov/publications/p544/ch01.html#en_US_2016_p...