Corporate Limits On Contributions from Non Shareholders?

Hello there,
I just recently formed a C-Corporation and am looking to raise capital. On top of the sale of shares in the company, I am also looking at the idea of seeking outside help to raise money such as fundraisers to raise money for the company and am wondering the legality of what I would like to. Because I am not a non profit, what limitations does the IRS have on contributions/fundraising?

The IRS does not impose limitations on the amount of capital that a corporation can raise. This is an area regulated by each state (under what is know as "blue sky laws") and the U.S. Securities and Exchange Commission ("SEC"). For the U.S. rules, go to the links below. For particular state rules, go to the website for the state's Secretary of State.

"Blue sky law" is a popular name for laws that all states have enacted to protect the public against securities frauds. There are state exceptions for very small offerings made to "sophisticated investor". There are exceptions to the U.S. SEC registration requirements (e.g. if you only raise capital in the one state that your business is located to a small number of investors).

The registration rules apply to the sales of shares to others and if your give shares to employees or others for working for your corporation. If you give shares to employees then the employee must reimburse you for the employment taxes on the value of the shares and you must remit to the IRS both the employer and employee taxes, then include the value of the shares and taxes on the employee's W-2 . If you give shares to independent consultants or other companies for services provided, then you include the value of the shares on an annual form 1099 issued to them. All of these shares will be considered "restricted" which means that they are not freely tradeable from one person to another unless registered with the U.S. SEC. Restricted shares can be sold to a qualified person without being registered with the U.S. SEC.

The IRS does have a change of ownership rule which limits the deduction of prior tax losses against future income when more than 50% of the ownership of your corporation changes hands in any rolling 36 month period. This is under Internal Revenue Code Section 382.

Contributions by Non-Shareholders
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Contributions by Non-Shareholders are NOT taxable income to the corporation. If the non-shareholder contributes property, the basis in the property is zero. If the non-shareholder contributes cash, the basis in property acquired with the cash is reduced by the amount of cash. See the link at http://www.unclefed.com/IRS-Forms/2001/H... Also, check out IRS publication 542, page 5 related to capital contributions by non-shareholders at http://www.irs.gov/pub/irs-pdf/p542.pdf which covers the same thing.

Any profit you derive from "fundraisers" will be taxable income. After all, you could describe the purpose of any business activity as raising funds.

As you are not a nonprofit, you should take care to avoid misleading people into believing that you are, or that "contributions" to your business are tax deductible. There are probably state or local laws in your area that regulate such activities as well.

You should consult a general business attorney as well as a tax advisor.

Let me get this straight, you think you can collect donations to start your business? Or, is the extra money from new shareholders as additional paid in capital or as loans? If you can get gratis contributions, the proceeds are going to be taxable as gross income. Good luck.