What assets can founders contribute to share capital?
In general, there are plenty of ways for founders to form a share capital and pay for shares of the company. Money, or cash, still remains the most frequently used method. However, alternative ways of contribution to share capital becomes more popular with every year. At the same time, there are different lists of possible alternatives in different countries. It is very important to understand such difference as it may affect the founder’s decision regarding the country of incorporation.
Limited liability company (LLC) remains the most popular form of company formation in IT sphere. In this article, we decided to analyse several most popular incorporation jurisdictions for IT business, namely Delaware in U.S., the UK and also Poland as the newly popular and growing market, to see what types of contribution for founder’s shares in LLC are permitted in these countries.
Contribution to share capital in Delaware, the U.S.
According to the Delaware Code, the contribution of a founder or member to a limited liability company may be in cash, property or services rendered, or a promissory note or other obligation to contribute cash or property or to perform services.
Delaware laws give founders the wide scope of types of contribution to share capital. The term “property” includes all types tangible and intangible property, including intellectual property (software, designs, separate codes, trademarks etc.), real estate, stocks, securities etc. Services, both performed and promised to be performed, may be used by founders to form a share capital of a company. For example, if founders are going to establish a company, the cost of registration of the trademark in the USA may be contributed to share capital by founders. Please note, that you cannot contribute cost of services to share capital of corporation under the Delaware laws.
However, you should keep in mind the tax obligations. For example, if you contribute already created software to share capital of a company you do not need to pay taxes on it but if you contribute obligation to develop software to share capital of a company you will need to pay taxes on such contribution. Also, sometimes it is required to conduct an official evaluation of your contribution (intellectual property, services etc.) in order to determine its real value and to prevent the formation of bubble companies.
Contribution to share capital in the UK
Company Act 2006 provides that shares allotted by a company may be paid up in money or money’s worth (including goodwill and know-how). Money’s worth are defined as:
- something that is of direct monetary value to the employee; or
- something that is capable of being converted into money or something of direct monetary value to the employee.
Basically, the UK legislation provides founders with even more instruments to pay for their shares than Delaware laws do because of the goodwill category. Goodwill is an intangible good, namely the assessment of the entity’s activities in terms of his business qualities. In other words it may be explained as a business reputation of a person or entity. Other types of money’s worth are everything valuable, e.g. intellectual property, services, securities etc. Therefore, you may form a shared capital of LLC in the UK literally with everything that has a money value.
The UK laws impose some restrictions regarding this matter if you are going to create a public company. For example, it is restricted to accept as a payment for shares and undertaking to do work or perform services. Likewise, all non-cash considerations for shares must be valued under the specific procedure in order to establish their real cost.
Contribution to share capital in Poland
Registration of IT company in Poland became a hot topic within last couple of months. We decided to take a look on its legislation requirements as well. First of all, it is restricted to contribute inalienable rights, receivables or provision of services to the share capital of the company. Secondly, if contribution for shares is made by founder in kind, articles of association shall specify in detail that in-kind contribution, the founder who makes such an in-kind contribution and the number and nominal value of the shares acquired for such contribution.
In general, Polish laws have strict rules regarding contribution to share capital, for example:
- if founder has made a defective in-kind contribution, that founder shall make good to the capital company the difference between the value set out in the articles of and the sale value of the contribution;
- remuneration for the services provided upon creation of the company may not be paid from the funds paid in for the share capital, nor can it be credited towards the founder’s contribution.
Therefore, in Poland founders may pay for shares by money or in-kind consideration, namely property, both movable property and real estate, intellectual property, securities etc.
How to make a contribution to share capital?
Value and type of founder’s contributions to share capital have to be specified in the legal document related to the incorporation of a company. Founders shall specify the value and type of contribution they made in articles of association of statute of a company.
Also, if founders contribute software or other intellectual property to share capital they need to sign an Intellectual Property Assignment Agreement or Technology Assignment Agreement with the company determining the characteristics of the intellectual property and its value.
If founders contribute rendered services or services that are to be rendered to share capital they need to sign a Services Agreement in this regard. U.S. laws require founders to execute a promissory note, which is a written undertaking to perform certain services as a contribution to share capital.
Thus, legislation of different countries provides almost the same requirements regarding the possible types of contribution to share capital of LLC, except as to the right to contribute services. Also, there are always more strict requirements regarding the contribution to share capital of public companies, namely the limitation regarding the goods or services which can be contributed to share capital, the requirement to conduct an official evaluation of non-cash contributions and specific rules regard to payment procedure.
Lyaskivskij Ivan
Senior IT lawyer