Capital Asset Assignment for Pre Incorporation Software Contributions
Pre incorporation software assignment transfers copyright from individual authors to a new corporate entity as a non cash capital asset contribution.
section 351 transfer
Meaning
Provision in the federal tax code allows individuals to move assets into a corporation without triggering an immediate tax liability on the gain. The application of a section 351 transfer occurs when property is exchanged solely for stock and the transferors hold at least eighty percent of the company voting power immediately after. This mechanism facilitates the formalization of startups by allowing founders to contribute their work without a heavy cash burden.
Regulatory Compliance
Adherence to the specific requirements of the national tax authority ensures the deferral of capital gains. To qualify for a section 351 transfer, stock is required. This compliance protects the liquidity of the founders during the critical early stages of the business.
Control Requirement
Statutory threshold for ownership dictates who can participate in the tax deferral. The eighty percent rule ensures that a section 351 transfer is used for genuine corporate formation to the exclusion of a simple sale of assets. It applies to the group of transferors as a whole, allowing for multiple founders to contribute at once.
Asset Conveyance
Movement of intellectual property or equipment into the corporate shell must be documented precisely. The basis of the assets in the hands of the corporation remains the same as it was for the individual in a section 351 transfer. It remains the primary pathway for transitioning from an informal project to a legal entity.
The success of this move depends on the timing of the share issuance and the nature of the property contributed to the new business.