Don’t be late to the party at 83(b)
My co-founders and I recently formed a C-Corp, and have been learning some of the formational intricacies that we avoided in our last company (which was an LLC). One of these is the need for founders/employees to make our IRS Section 83(b) elections. There are some great posts out there by people like Dave Naffziger and Startup Company Lawyer to explain this in depth, but I wanted to share some personal context, and hopefully add a few words of wisdom.
So, what is this 83(b) stuff? It's a section of the IRS Code of 1986 that permits a special tax designation that can save startup founders & employees from incurring large capital gains taxes ($10k+) on stock issued through a vesting agreement as compensation (essentially worth $0 in early days).
Who: employees (for startups organized as Corporations) who are receiving stock on a vesting schedule
What: a form (no standard from the IRS, but there are some basic docs out there) that identifies founder/employee, number of shares he/she owns, date when shares were awarded, tax year, Fair Market Value (FMV) of each share (based on your supposed valuation), the Amount Paid by the founder for each share.
When: you must file within 30 days of issuing stock (this is a HARD deadline, so don't mess with the IRS on this, all you Pareto devotees and procrastinators!)
Where: umm, yeah, nothing to put here, but I was told to use these 5W's and an H…
Why: without the designation, founders/employees pay taxes on the stock grant, and at each vesting interval. With the 83(b) election, you can defer taxes until your shares in the company are sold (ie a liquidity event, when you can hopefully afford to pay those taxes!)
How: send the form to the IRS (usually via your lawyer)
A few pieces of advice I was given that I didn't see listed anywhere else:
– It's likely a good idea for your FMV and Amount Paid to be the same. Hence, no gain. (please, correct me on this if I'm wrong).– You'll probably be guessing on your valuation, so don't get too hung up on the number you choose. This might range from Par value (something like $0.001/share) up to $1/share. See example in Dave's post.– File this within 30 days of awarding shares! (Ok, I saw this advice everywhere, but worth repeating)
So, startup founder, I hope this saves you some time so you focus on building your business and changing the world! As for me, back to indoor maps…
Disclaimer: I'm not a tax expert, yatta yatta. And if you know better, please discuss on the comments!