Payment for Shares

Payment for Shares

When issuing stock, it is important that full payment be made by the purchasers. If the shares have a par value and the payment is in cash, then the cash must not be less than the par value. In many states, promissory notes cannot be used in payment for shares. The shares must not be issued until the payment has been received by the corporation.

Trading Property for Shares

In many cases, organizers of a corporation have property they want to contribute for use in starting up the business. This is often the case when an on-going business is incorporated. To avoid future problems, the property should be traded at a fair value for the shares. The directors should pass a resolution stating that they agree with the value of the property. When the stock certificate is issued in exchange for the property, a bill of sale should be executed by the owner of the property, detailing everything that is being exchanged for the stock.

Taxable Transactions

In cases where property is exchanged for something of value, such as stock, there is often income tax due, as if there had been a sale of the property. Fortunately, the Federal Tax Code allows tax-free exchange of property for stock if the persons receiving the stock for the property or for cash end up owning at least 80% of the voting and other stock in the corporation (Internal Revenue Service Code, Section 351). If more than 20% of the stock is issued in exchange for services instead of property and cash, then the transfers of property will be taxable and treated as a sale for cash.

Trading Services for Shares

In some cases, the founders of a corporation may wish to issue stock to one or more persons in exchange for their services to the corpora­tion. It has always been possible to issue shares for services that have previously been performed. Some states make it unlawful to issue shares for promises to perform services in the future.

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