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  1. #1

    Default Changing an Agreement for Issuance of Shares to Reduce Tax Liability

    My question involves business law in the state of: Delaware.

    We have a C corp in the state of Delaware. It is just me and my friend doing our tech startup as a hobby.

    According to our Founder's Agreement the shares delegated to the Founders partially vest as of last year. Can we not issue shares if we both agree? If we issue shares as per the Founder's Agreement, there will be a huge franchise tax for Delaware (around 25% of 5,000,000 shares would partially vest). This would be a burden to our company because it doesn't yet have any revenue. Would the state of Delaware or the IRS object to us not issuing shares even though our Founder's Agreement said we were going to?

  2. #2
    Join Date
    Oct 2006
    Posts
    16,474

    Default Re: Choosing to Not Issue Shares to Founders with Consent

    Quote Quoting throwawaybottle
    View Post
    My question involves business law in the state of: Delaware.

    We have a C corp in the state of Delaware. It is just me and my friend doing our tech startup as a hobby.

    According to our Founder's Agreement the shares delegated to the Founders partially vest as of last year. Can we not issue shares if we both agree? If we issue shares as per the Founder's Agreement, there will be a huge franchise tax for Delaware (around 25% of 5,000,000 shares would partially vest). This would be a burden to our company because it doesn't yet have any revenue. Would the state of Delaware or the IRS object to us not issuing shares even though our Founder's Agreement said we were going to?
    Why did you choose a C-corp rather than an S-corp? I believe that based on what you have done so far, you probably need to run anything that you want to do now before an attorney.

  3. #3
    Join Date
    Oct 2014
    Posts
    8,238

    Default Re: Choosing to Not Issue Shares to Founders with Consent

    Quote Quoting throwawaybottle
    View Post
    My question involves business law in the state of: Delaware.

    We have a C corp in the state of Delaware. It is just me and my friend doing our tech startup as a hobby.

    According to our Founder's Agreement the shares delegated to the Founders partially vest as of last year. Can we not issue shares if we both agree? If we issue shares as per the Founder's Agreement, there will be a huge franchise tax for Delaware (around 25% of 5,000,000 shares would partially vest). This would be a burden to our company because it doesn't yet have any revenue. Would the state of Delaware or the IRS object to us not issuing shares even though our Founder's Agreement said we were going to?
    This is all about Delaware franchise tax, and if you didn't consult a Delaware corporate tax attorney before you decided to go this route that's not good and you certainly should be consulting one now. For federal taxes this isn't something that much matters one way or the other.

    I do wonder, as llworking did, why in the world you'd start this "hobby" venture out as a C corporation, assuming you both are U.S. citizens. I hope it's not because that's what you see big corporations do and thought that must be good for you to do, too. I've seen lot's of clients come in that had screwed themselves up with that line of thinking.

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