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Slicing Pie – Legal and Tax Issues
Primary Legal/Tax Issues
• Control of the company when Grunt Fund is operating
• Avoiding tax when Grunt Fund “split” occurs
• Achieving “rules” of the book
Slicing Pie – Legal and Tax Issues
Control of Company while Grunt Fund is in place
• Don’t need business entity
• If have a business entity, need to make two decisions:
• How much initial equity to grant
• If corporation, small amount is suggested (10 shares total)
• If LLC, percentages only
• Comprehensive agreement now or later
• Operating Agreement
• Shareholder Agreement
• Or if none, then rules set forth under statute
Slicing Pie – Legal and Tax Issues
Avoiding tax on Grunt Fund “Split”
Here’s the issue:
• IRS assumes that equity is always split up-front (often,
business value at this point is $0)
• Slicing Pie calls for Grunt Fund to determine equity split on
some future date (when the business could have some real
value)
• The grant of valuable equity is income to the recipient
Slicing Pie – Legal and Tax Issues
Avoiding Tax on Grunt Fund “Split”
Here’s the solution for Corporations:
• At the beginning of the Grunt Fund, all participants are granted
some number of shares of Restricted Stock
• Restricted Stock is stock which is subject to vesting
• Restricted Stock can be valued in one of two ways
• When vested (future date)
• When it is initially granted (current date – must make 83(b) election)
• Participants make 83(b) election immediately to recognize $0
taxable income
• Grunt Fund “split” occurs at some future date employees are ratably
Slicing Pie – Legal and Tax Issues
Avoiding Tax on Grunt Fund “Split”
Here’s the solution for LLCs:
• At the beginning, participants can but need not be assigned a
percentage interest in the LLC
• At the Grunt Fund “split” the participants’ percentage interests
are modified per the Grunt Fund
• The new percentage interests count for voting and future profits
• For very complicated tax reasons, these percentages might not apply to
losses for a while
• If the company were to dissolve, any assets would be distributed based
on “capital accounts” again, for complicated tax reasons.
Slicing Pie – Legal and Tax Issues
Achieving Other “Rules” of Book
• Grunt Fund Split
• Agreement of everyone
• “Sufficient” cash flow from investment (defined) or
operations (undefined)
• Sales of the company
• New Grunts – Agreement of Grunt Leader
Slicing Pie – Legal and Tax Issues
Achieving Other “Rules” of Book
• Termination
• Resignation
• Without Good Reason
• Company has option to return “hard” inputs (not including time) as buyout; OR
• Allow Grunt to retain equity (no voting)
• With Good Reason
• Company has option to return full value of all inputs (including time) as
buy-out (or FMV if greater) plus claw-back sale if within 1 year; OR
• Allow Grunt to retain equity (no voting)
• Termination
• For Cause – Same as resignation without Good Reason
• Without Cause – Same as resignation with Good Reason