Tax Consequences of Taking Equity
If you're thinking about taking equity instead of cash as payment for services, consider this.
Robyn Sachs's $28 million advertising and public relations company, RMR & Associates, in Rockville, Md., began receiving equity from some clients in exchange for services two years ago. She made the mistake of putting the equity deals on the books of a C corporation, which meant she could have faced double taxation down the road. When C corporations are sold or liquidated, there can be a tax on appreciated assets levied not only on the corporation but also on the individuals who are corporate shareholders.
When Sachs found out about the possibility of double taxation, she set up Silicon Beltway LLC, a sister company of RMR, through which all equity transactions are now handled. Under the LLC, no corporate-level taxes apply upon liquidation. "The key is not to trap gains in a C corporation," says Steve Wiltse, partner at accounting firm Argy, Wiltse & Robinson PC, in McLean, Va. "You want some flexibility by doing the deals in a pass-through entity like an S corporation or an LLC."
-- As reported by Ilan Mochari, Inc. magazine.
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