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Try to arrange your corporate affairs to qualify for this treatment. If you suffer a disaster in your business and have to close it, you will be glad you took pains to so qualify, as it will result in the IRS partially reimbursing you for the loss, via a tax deduction.
Who Will Be «he Owners (Stockholders) of Your New Corporation?
If you are incorporating an existing business, this question is probably already decided. In other words, if you are operating as a sole proprietorship and are changing to the corporate form, you probably will be the sole stockholder of your corporation. However, that is not necessarily true in all cases, because incorporating your business makes transfer of ownership easier, and that may open some estate planning opportunities for you. For instance, you may want to issue the stock in a corporation to yourself and your spouse jointly (assuming you have a stable marriage), as that would enable him or her to easily continue the operation of your business if you should die or become disabled. Estate planning is beyond the scope of this book, but it would be well to check with your attorney, accountant, or financial planner, as to what family members should be the owners of the corporation, or who will inherit how much of the corporation sometime (in the distant future, we hope).
If you are already operating as a partnership and you and your partner have decided to incorporate, the stock normally would be issued in the
INCORPORATE YOUR BUSINESS
same proportions as are the present percentages of ownership of the partnership. For instance, if yours is a two-person partnership and you and your partner are equal partners, the corporation’s stock would be issued one-half to each partner. That is not to say that the allocation of stock has to be that way. It can be any way that you and your partner wish. For instance, it may be that one of the partners wants to retire and part of the retirement process could be to incorporate and issue a smaller percentage of the stock to the retiring partner.
If you are starting a business as a corporation from day one, your choices as to who will own stock in your corporation are unlimited. Bear in mind, though, that if you intend to elect S corporation status, you are limited to eligible stockholders (individuals and certain specific trusts and estates), as explained in Chapter 2.
Whether you are incorporating a new or old business, remember that it is much easier to issue stock or to transfer stock to a new stockholder than it is to retrieve the stock if that becomes necessary. In other words, do not be in a rush to issue any stock in your corporation to other individuals until you are confident they are the individuals with whom you want a longterm business relationship and that they will be motivated by an opportunity to share in the growth of your business.
Determine How Many Shares of Stock Will Be Authorized and Issued
When a state authorizes the existence of your corporation, it will issue a corporate charter which, among other things, will specify how many shares of stock are authorized and how many are issued to stockholders.
Planning Your Corporation
This is a scenario where many incorporators take the easy route and come to regret it later. In other words, if Aunt Bessie sets up a small corporation to sell her needlework, she may decide that she needs only one share of stock to be authorized by the state and that one share is to be issued to her. Business is good, and Bessie gets behind in filling her orders. She invites Lorna to help her in exchange for a one-third share of the business. Now Bessie has a problem of how to divide one share of stock. While some states permit fractional shares to be issued, it certainly is not the easiest way to keep track of who owns how much of the corporation. So Bessie may decide that she needs to have more shares authorized by the state, which, although generally possible, entails more forms to be completed and submitted to the state along with a fee! While using fractional shares would be relatively simple for Bessie and Lorna (two-thirds for Bessie and one-third for Lorna) it can get messy when more investors want on board. Such is the following example:
Jim started a corporation with one share authorized. When three others joined him, he issued fractional shares out of his one share. For various reasons, each had a different fraction of the share, and it ended up this way: Jim owned six-seventeenths of a share, Mary owned three-elevenths, Phyllis owned four-thirteenths. Bert owned how much? It takes a math major to figure it out, but you get the idea: Fractions of shares can be a pain. It is much easier to request the state to authorize many shares at the inception of the corporation, even though only a few shares may be issued to the original stockholder(s). If Bessie had originally requested that the state authorize
1,000 shares and then issued 100 of them to herself at the inception of the corporation, she would be in a position to issue, in exchange for some investment, 50 shares to Lorna at some future date. That is much easier to comprehend and record than dealing with parts of one share.