The founders of an early stage company are typically compensated in some combination of cash and stock. In so much as most early stage companies have more of the latter than the former, frequently founders will only be compensated with stock of the company for a period of time, and that’s usually done under a founder restricted stock agreement.
So, what’s an S-Corp? Does it make sense for your company? Do you need an advanced accounting degree to figure it out?
First off, an S-Corp isn’t a different kind of entity than a typical corporation (the C-Corp), it’s just a tax election. That is, structure, operation, even legal formation documents could be exactly the same regardless of which type of corporation you are (though you’d probably want to tailor your Articles of Organization, but that’s a different post). The point is, legally, both entities are exactly the same. When you become an S-Corp, that just means that you meet certain qualifications and make a filing with the IRS so that you’re taxed differently.
As such, before you can understand what makes an S-Corp special, you have to understand how a regular C-Corp is taxed. You have to understand the concept of double taxation. [Read more…]
Last week in Part 1 of this two-part post I discussed what an 83(b) election is and walked through one particular situation in which someone should make that election (hint: if the company is currently valued at or close to nothing). In this installment, I’ll go through an example in which it doesn’t make good financial sense to make that 83(b) election. In a world where many founders, entrepreneurs, and contractors working for equity are told to automatically file the election, this is the scenario to really pay attention to. [Read more…]
What’s an 83(b) election, and when is it a good thing to do? Great question, and one every entrepreneur, founder, contractor, or anyone else trading work for equity should know the answer to. In this two-part post, I’ll first explain what the 83(b) election is, then I’ll walk through a situation where making the election makes good sense, and in the second installment I’ll walk through a situation in which making the election wouldn’t make sense (and some other considerations that might prevent you from making it). And with that, off we go.