How to Capitalize C Corporations

Summary

This practice note discusses how to capitalize (i.e., how to fund) a new C corporation (unless otherwise indicated, references to a corporation throughout this practice note are to a C corporation) and the corresponding U.S. federal income tax consequences to the shareholder transferors and the transferee corporation in an equity transaction. This practice note is divided into two parts: to begin, we explore the U.S. federal tax consequences involved in contributing property to a corporation, and then we review the differences between equity and debt funding and discuss the potential pitfalls and advantages of debt and equity instruments in practice.