Q: Raising capital for a DE LLC with a Y-Combinator SAFE. Do I file anything to ensure investors are protected by IRC 1244?
The business meets all the qualifications of IRC 1244. I need to know if anything should be filed and with whom to offer the 1244 protection to investors. Also, I need to know what documentation should be retained and ultimately delivered to my investors if a loss is generated.
A:
To The Code also imposes recordkeeping requirements on the corporation relative to its §1244 stock. Among these is requirement that the corporation designate designation, for its transitional year, those of its outstanding shares that qualify for small business stock treatment.
(b)Common stock. Only common stock, either voting or nonvoting, in a domestic corporation may qualify as section 1244 stock. For purposes of section 1244, neither securities of the corporation convertible into common stock nor common stock convertible into other securities of the corporation are treated as common stock. An increase in the basis of outstanding stock as a result of a contribution to capital is not treated as an issuance of stock under section 1244. For definition of domestic corporation, see section 7701(a)(4) and the regulations under that section.
So your LLC must be treated as a corporation for tax purposes and in your operating agreement or the first meeting of Managers and Members the election to treat the units issued by the LLC must be elected to be treated as though it is 1244 stock. You need an attorney and/or CPA to assist you with this. This is not something you should do yourself.
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