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Get & Give Tax Help for Small Businesses

Time and Effort Contribution vs. Capital Contribution in forming an S Corporation

Hi Linda,

A friend and I have spent the past several months creating a company. We have designed a product, developed a marketing campaign, and found a company to formulate and produce the product. Using hypothetical numbers, the fee to initiate the formulation is $10,000 and the cost for a first run of production is $10,000.

We are now at the point in which we need to submit the paperwork to create an official business and raise capital. Between the two of us, we only have enough money to cover the initial $10,000 and, therefore, must raise the remaining $10,000.

We're interesting in forming an S Corporation rather than an LLC or C Corporation. To my question - if we form an S Corp and each contribute $5,000 and then raise the remaining $10,000, does that mean we are only eligable to own 25% of the company each, based on S Corp laws? And, the remaining 50% ownership will go to whomever contributes the $10,000?

Or, does our months of development an planning count as a contribution worth some level of ownership beyond actual $ contributions?


New S Corp