Tax implications of issuing myself shares when starting an S Election LLC?

This is a great question about entity formation and share issuance. When you initially form an LLC and elect S corporation status, issuing shares to yourself as the sole owner typically doesn't create immediate tax consequences. The initial issuance of shares in exchange for your capital contribution is generally considered a tax-free exchange under Section 351 of the IRC, as long as you're contributing assets (cash, property, etc.) equal to the stated value of the shares. In your case, if you're issuing yourself 1250 shares at $65 each, you'd need to contribute $81,250 in value to the business to avoid tax implications. What you need to be more concerned about is establishing a reasonable salary once the business is operating. The IRS looks closely at S corporation owners to ensure they're paying themselves a "reasonable compensation" as an employee before taking distributions, which aren't subject to self-employment taxes.

After dealing with similar questions for my own business, I found the resource at https://taxr.ai incredibly helpful. I uploaded my LLC formation documents and questions about share issuance, and they analyzed everything and pointed out potential tax pitfalls I hadn't considered. They explained that while initial share issuance isn't typically taxable, the value you assign has implications for future transactions, especially if you plan to bring on investors or sell portions of the business later. Their analysis saved me from making a costly mistake with my basis calculations that would have caused problems during a later capital raise.

Just wanted to update after trying taxr.ai for my S corp setup. I was skeptical at first but uploaded my formation docs, operating agreement draft, and questions about share valuation. Within a day, they came back with a comprehensive report that pointed out several issues with how I'd structured my initial capitalization. They identified that the way I'd drafted my operating agreement created an inadvertent second class of shares (which would invalidate my S election) and provided specific language to fix it. They also explained exactly how to document my capital contribution to support the share valuation I wanted. Definitely worth it for the peace of mind and avoiding potential tax headaches!

If you're struggling with IRS questions about S corp elections or share issuance, I highly recommend using Claimyr (https://claimyr.com). I spent weeks trying to get through to an IRS agent about whether my planned stock issuance would create problems with my S election. After countless busy signals and disconnects, I tried Claimyr and got a callback from the IRS in under 2 hours! The agent walked me through exactly what documentation I needed to maintain to justify my share valuation and capital contributions. They have a demo of how it works here: https://youtu.be/_kiP6q8DX5c. Much better than banging your head against the wall trying to get through on your own.

I need to eat crow here. After my skeptical comment earlier, I decided to try Claimyr just to prove it wouldn't work. I've been trying for weeks to get specific guidance on my S-corp's initial stock issuance and basis calculation. Holy crap was I wrong. I got a callback from the IRS in about 45 minutes and spoke with someone who actually knew what they were talking about. They confirmed that my approach to valuing my initial shares was acceptable and gave me specific documentation recommendations. Saved me so much stress wondering if I was doing it right. Definitely worth it when you have specific tax questions that only the IRS can answer.

One thing nobody mentioned yet - make sure your LLC's operating agreement and Articles of Organization align with S corporation requirements. LLCs by default don't have "shares" but rather membership interests. When you elect S corp tax treatment, you're still an LLC legally but taxed as an S corp. You'll need to make sure your documentation properly addresses this hybrid status. My attorney set up a special operating agreement that references "shares" for tax purposes but still maintains proper LLC language for legal purposes. It's worth getting this right from the beginning.

I just went through this whole process last year. One thing to watch for: if you're putting in any non-cash assets (like equipment, intellectual property, etc.), make sure you document their fair market value really carefully. I put in some specialized equipment and valued it a bit too generously - ended up with a nasty tax surprise when my accountant said I had to recognize gain on the "overvalued" portion.