Does unequal APIC create a second class of stock

[ChrisCPA]

I have a sole proprietorship that will be incorporating. We will do a section 351 transfer of assets into the newly formed corporation. The sole proprietorship has very little equity based on the historical book value of the assets. We will also be transferring debt along with the assets but there will be no gain since the assets will be slightly more than the debt. While this is happening we will be purchasing the assets and goodwill of another entity and admitting a new shareholder at the time of incorporation. As mentioned before there is little equity in the business but the FMV of the assets over debt would require the new shareholder to contribute cash in exchange for stock. This would create additional paid in capital since the assets are transferred at the tax basis and not the FMV. This APIC would only increase the basis of the new shareholder. Does this cause any problems with the stock such as a second class? The additional contribution will be unequal but the original stock issue will be equal.

[JohnH]

Why not treat the difference as a note payable to the other shareholder rather than APIC?

[OldJack]

As I understand it you are concerned about the fact that one shareholder is paying more per share for his shares of stock than another stockholder will be. This is perfectly appropriate and desirable in most cases. A corporation can sell its stock for whatever the market (or fool) will pay for the shares as long as it is not selling at a discounted FMV price to a related person.

Example: Today I organize a corporation and contribute $500 for 1,000 shares of common stock. Tomorrow you wish to purchase shares as you think the corporation is going to make money. The corporation can sell you 1 share of common stock for $500,000 if you are willing to buy. If the stock is no par stock it would simply show on the balance sheet as common stock issued $500,500. If it was $1 par value stock the balance sheet would show common stock issued $1,001 and additional paid in capital $499,499. The additional paid in capital is equally per share owned at liquidation of the corporation. [edit:] And to answer your question, there is only common stock issued and additional paid-in capital does not create an additional class of stock since it is only capital designated separate for accounting of par value purposes.

Also, you should be aware that in a code sec. 351 transaction the corporation can record FMV for the assets contributed and issue shares of stock on that basis, however, depreciation basis is still the same as the individual's sole proprietorship basis. Thus, you would record each asset as two asset values on your depreciation schedule with the additional FMV over basis as a non depreciable asset.