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Tax Issues for Incorporation: some ownership to daughter

Nancy and her daughter, Margaret, have been working together in a business called The Floral Shop. Nancy formed the business in 1990 as a sole proprietorship. Because Nancy was well known and liked in the community before starting the business, the business has been very successful. It currently has assets with a fair market value of $ 250,000 and a basis of $ 180,000. On advice of her tax accountant, Nancy decides to incorporate, The Floral Shop. Because of Margaret's loyalty and her desire to have Margaret take over the business when Nancy decides to retire, Nancy would like her to have shares in the corporation. What are the relevant tax issues.

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The following scenarios are all separate trains of thought which are not connected or sequenced to each other:

1. Nancy would presumably incorporate under Sec 351 which allows a tax free transaction, but one of the constraints of using Sec 351 is that the resulting corporation must be 80% owned by the previous ownership of the incorporated business. This poses a limitation on having Margaret own too many shares at the outset.

2. Nancy can gift ownership interest through transferring shares to Margaret but two constraints need to be recognized: first, the 80% rule above including a time ...

Solution Summary

The solution provides a list of possible methods to transfer ownership to daughter, Margaret. The range of solutions includes methods before incorporation, as part of incorporation or after incorporation. There are at least seven methods of accomplishing the goal.