Partner Putting 100% of Cash... Attorney Mentioned I'm Liable for Taxes?

March 09, 2022

by a searcher in Glendale, AZ, USA

Spoke to a business lawyer earlier today and when I told him my partner would be financing the entire deal, he told me I'd be liable for taxes on the percentage of equity I receive on day one. Basically, if I got 25% of a company worth $1M, I'd owe taxes on the $250K because I didn't put any capital down. Is this true? I'm not sure I really wrapped my head around his explanation.

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Reply by a searcher
from Emory University in Atlanta, GA, USA

I'm interested in hearing the comments on this.I thought you didn't need to pay tax until you sell the shares. I'm guessing you mean you would owe capital gains tax on the 250 so roughly 37k? If this is true I'm guessing this is an easily avoidable issue. I don't know what your cap table looks like but couldn't you just avoid this by making your shares options or vest over a set amount of time so you wouldn't owe any taxes until you exercised them? This might dilute your voting power but at 25% it probably does not matter. Also, how did you value your search fund and the work you did to bring the deal together? Also, this is assuming you're a USA based searcher.

Reply by a professional
from Dartmouth College in Los Angeles, CA, USA

There's a way to structure this to minimize liability but you have to involve a tax attorney to make sure it is documented correctly. A business attorney will have a general understanding of the principles but can't be relied on to provide the best advice around these issues.

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