1. Founder has formed a c-corp, now wanting to issue shares to management team partners. =======>>The most basic characteristic of the corporation is that it is legally viewed as an individual entity, separate from its owners, who are now shareholders, not partners.
2. 16 Million share are registered for a California securities exemption.
3. No shares have been sold yet.
4. First founder that formed the c-corp owns all shares now.
5. First founder wants to issue shares to partners now at a value of 0.0001 or something low like that.
6. The partners get shares and start working and the c-corp then sale shares to investors for a dollar a share. ======>In general, A firm ,to compensate shareholder employees beyond salaries / bonuses, often grants incentives like stock options and restricted shares. Stock options give employees the right to buy the firm?s stock at a preset strike price. The value of a stock option is the current price of the stock less the option strike price ; say, a stock option with a strike price of $20 is worthless as long as the stock price is $20 or less. But should the stock price zoom up to $50, each stock option would be worth $30 a share. The number of shares represented by the option determines the shareholder employee?s ultimate gain. If management sets each option to convert into 1k shares, then in this example each option would be worth $30K.
However, restricted shares are shares of the firm stock vested to shareholder employees over time. They are restricted in the sense that a shareholder employee cannot sell them until the shares vest. I mean restricted shares have, when vested, the same value as normal shares trading on the stock market. Restricted shares cost sharerholder employees nothing, and receiving them is not a taxable event. but shareholder employees are taxed as the shares vest. Vesting usually occurs in stages over a number of years, with specific percentages of holdings becoming the shareholder employee?s property in each year. When a share is vested, the shareholder employee must note the share value on the vesting date and pay taxes on that amount as ordinary income. Any dividends received on restricted shares are taxable at ordinary rates, whether vested or not.. Within 30 days of receiving restricted shares, a shareholder employee can elect Section 83b tax treatment. Under this scenario, employees pay ordinary taxes on the shares when they are granted, calculated using the share price on the grant date. There are two benefits: shareholder employees do not owe any taxes when the shares vest; and shareholder employees receive long-term capital gains treatment when they eventually sell vested shares if held for at least 12 months following vesting. The downsides are that if the stock never appreciates, the shareholder employee paid earlier taxes without benefit, and if, for some reason, the shares have to be forfeited after 83b election, the tax paid cannot be recovered.
7. The event of the investors shares being sold I think established a value only when that event takes place.
8. The new partners file 83b election while shares are low
The question is, is there any chance the IRS will say the value existed at the time partners got the shares at the low price? If the investor?s shares are sold for a dollar per share just weeks or a month after partner shares are sold a fraction of a penny, then can the IRS assess tax on the partners based on what the investors paid?======>>>>>>>>> I guess it is more or less complex situation; in general, failing to make a timely 83(b) election with the IRS is something that could lead to disastrous tax consequences for a startup company founder / shareholder employee; as corp founders typically purchase stock pursuant to restricted stock purchase agreements allowing the company to repurchase ?unvested? stock upon termination of employment, shareholder employees ALSO may ?early? exercise options subject to the company?s ability to repurchase ?unvested? shares upon termination of employment.
Under Section 83 of the IRC, the founder/ shareholder employee would not recognize income , I mean one dollar minus $0.0001, until the stock vests. However, if the founder/ shareholder employees make a voluntary Section 83(b) election, the founder/ shareholder employees recognize ?income? upon the purchase of the stock.Say,You and your bud start a company and purchase stock at the par value of $.0001 per share that is subject to a 2 year cliff and a 4 year vesting period. Your friend promptly files an 83(b) election, but you forget to do so. At the end of the 2 year cliff the stock is worth $1.00 per share. Because you did not timely file an 83(b) election, you would recognize $0.99 per share as income, even if you do not sell the stock. As the remaining stock vests, you would also recognize income of $.99 per share price at which you purchased it.
In contrast, because your bud promptly made an 83(b) election, he would not recognize any income as the stock vests because the 83(b) election accelerated the recognition of the income from the stock transfer to the purchase date. Section 83 b should be of concern to founders and shareholder employees receiveing stock that is subject to vesting. 2 examples are when a founder or a shareholder employee signs a restricted stock purchase agreement or if they agree to a stock option plan allowing them to exercise their options prior to vesting, but subject to a restrictive stock agreement. So, yu need to check if your particular circumstances raise a potential Section 83b issue before signing a stock purchase agreement. note; as you cans ee, when equity is given to a shareholder employee in afirm as compensation, then the shareholder employee hasto pay taxes on it the same wayhe/she has to pay taxes on any other income. When it comes to how much he/she pays, the IRS is going to calculate his/her tax liability based upon the FMV of the equity at the time it?s transferred to the shareholder employee. When it comes to when he/she?ll pay those taxes, the IRS is going to require hime/her to pay tax on the income during that year in which the equity is actually transferred to the empoyee such that the employee could do what he/she wants with it.The IRS has implemented the 83(b) election; this election lets you decide at the start of your vesting agreement to be taxed for the entire amount that will eventually vest at the present value. Rather than paying tax each year then, you pay all the tax up front based on the value of the stock when it was granted to you. In order to make this election, you have to send a letter to the IRS within 30 days of the grant being made. The IRS has published a sample letter that outlines all the information needed.