My client invested $25,000 in a PRE-IPO venture-backed business at the end of December 2020. He mentioned that this investment is through an SPV (special purpose vehicle, in this case, a series LLC).
He invested $25,000 and he will get a Sch K-1 for this investment. Because of the time restraint, he paid the full $25,000 but he invested $10,000 and two other people reimbursed him $7500 each for their investment in this $25,000. Therefore, my client owns 40%, and the other two investors own 30% each. He believes the business will go public in 2021 and therefore, the investment will convert to publicly traded stocks.
Issues:
We discussed gifting for the transfer but not sure that makes sense, since he may be subject to Estate Income Tax in the future.
We discussed setting up an LLC and transferring the stock to the LLC but he said the red tape on this purchase would make this a nightmare and not worth it.
I am also wondering if there are any other issues that I am not thinking of that I should be aware of.
Any feedback would be greatly appreciated.
He invested $25,000 and he will get a Sch K-1 for this investment. Because of the time restraint, he paid the full $25,000 but he invested $10,000 and two other people reimbursed him $7500 each for their investment in this $25,000. Therefore, my client owns 40%, and the other two investors own 30% each. He believes the business will go public in 2021 and therefore, the investment will convert to publicly traded stocks.
Issues:
- If the company does sell and it converts, how does he transfer the stock to the rightful owners?
- How should he handle the income that he will recognize for 2020 and possibly future years if not bought out?
We discussed gifting for the transfer but not sure that makes sense, since he may be subject to Estate Income Tax in the future.
We discussed setting up an LLC and transferring the stock to the LLC but he said the red tape on this purchase would make this a nightmare and not worth it.
I am also wondering if there are any other issues that I am not thinking of that I should be aware of.
Any feedback would be greatly appreciated.