1

Tax Consequences of Formation.

Neither a corporation, a partnership, nor an LLC is ordinarily taxed on the receipt of capital contributions (whether of cash, property, or services) by shareholders, partners, or members (as applicable). IRC A?A?721 (partnership and LLC), 1032 (corporation). However, a shareholder, partner, or LLC member may be taxed on the contribution, depending on the nature of the contribution.

2

Contributions of Cash.

A contribution of cash in exchange for shares of corporate stock, a partnership interest, or a membership interest in an LLC will not result in a taxable event for the contributing party.

3

Contributions of Property.

The contribution of property in exchange for shares of corporate stock (including shares in an S corporation) is a taxable event for the contributing party unless the transaction constitutes a tax-free exchange under IRC A?351 (transfers to a controlled corporation). If a contribution of property to a corporation is taxable, it will be treated as a sale of the property in exchange for the shares of corporate stock and the shareholder will usually be taxed on the difference, if any, between the shareholder's basis in the property and the property's fair market value. IRC A?1001. The contribution of property in exchange for an interest in either a partnership or an LLC (assuming the LLC is treated as a partnership or disregarded for tax purposes) is generally not a taxable event, and will not subject the contributing partner or member to tax liability. IRC A?721(a). However, if the contributed property is subject to a liability, the contributing partner or member may recognize gain.

4

Contributions of Services.

Contributions of services to a corporation (including an S corporation) in return for unrestricted shares of stock will generally be taxed to the contributing party as ordinary income to the extent of the fair market value of the stock received, although subjecting the stock to restrictions may enable the shareholder to defer taxable income. IRC A?A?61, 83. If a partner of a partnership or a member of an LLC taxed as a partnership contributes services to the partnership or LLC, as applicable, and receives in return an interest in the profits of the entity, but no interest in the underlying capital, in most situations the IRS will not take the position that the profits interest is taxable on receipt. Rev Proc 93-27, 1993-2 Cum Bull 343. If the partner or member receives a capital interest in the entity in exchange for services, however, the partner or member has taxable income. Reg A?1.721-1(b)(1).