My @Quora answer to Transitioning from non-funded personal project to funded build stage, how should I structure the…
Answer by Wray Rives:
Thanks for the A2A, but there are way too many variables, even with the details you have given, to properly answer this question. Here are the major issues I see that you need to consider:
- $100K gift is a really large personal gift. I have a hard time believing your mentor is not expecting something (equity, loan etc) in return. You are saying he is going to go through the hassle of filing a gift tax return and probably paying 35-40% gift tax on the "personal gift" you receive, sorry I don't believe that. Document what his expectations are and that will be a huge driver in what is the right business form. (could just be your use of the terminology gift, but even so he has expectations and you need to know what those are)
- Now if we assume this $100K really is a gift (I don't, but) and that you are going to try to come up with a viable business over the near term, then I would imagine you are also not going to be generating any net taxable income very soon, so why create an S or C corp and pay yourself a salary. That just creates taxable income, where there is none. If I am correct that this is an investment/loan, then different story and you do need to pay yourself to cover personal living expenses. Now you can have a real conversation about how nice a guy your mentor is and if he will gift you $14,000 to cover personal living expenses.
- No matter what entity you form now, if you are successful and attract "big boy" money then your new investors will probably want a new corporation to be set up anyway. So don't sweat what's going to happen in 6 months. Focus on what you have now and conserve as much cash as possible. A simple LLC will probably suffice for now, but go back to my first point, because your mentor/partner's expectation matter a lot and you want to protect yourself in this also.
- One place you do need to spend some money is on a CPA, attorney or other professional financial advisor. Kudos to you for coming on Quora and asking the question. Most individuals in your situation, just jump in head first and pay the price later for the things they did wrong. I am a little concerned that your mentor is not pushing you to talk to someone first and do things right, because he is doing you a disservice not to. I can come up with all kinds of conspiracy theories on that one, but I will take the high road for now.