Taxable Ownership Contributions

April 13, 2006

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When strategically funding your business, certain decisions may affect your tax status. A small business owner may have to recognize gain when acquiring an equity interest in the business if the owner:

receives it in exchange for a contribution of past or future services
receives some kind of property in return for the interest (a "disguised sale")
contributes property subject to a liability (such as an outstanding mortgage)
distributes previously contributed property to another owner within 7 years of the original contribution

The first three rules will apply in funding either the limited liability company (LLC) or the corporation, although the third rule will be applied differently in either case. The fourth rule applies only in the case of the LLC.

Warning

The rules that apply to subchapter S corporations are separate from those that apply to LLCs. Use this information only as general guidance and always seek a professional opinion specific to your situation.