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Corporation Questions


KallanDaMan

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I watched The Social Network today, so naturally the bit about diluting Eduardo Saverin's shares in Facebook down to almost nothing piqued my interest. So to any of you skilled in business here, care to answer a couple questions?

1) Say I own 60% of Corporation X with a charter topping off the maximum share count at 100,000 shares. But only 10,000 shares have been issued, distributed as follows: 6,000 Kallan; 4,000 Bob. What is stopping me, Kallan, from issuing 90,000 more shares and gifting them to myself (over time through options or in whatever way), thus diluting Bob's share from 40% to 4%? Is there anything other than my fiduciary responsibility to Bob that would stop me from doing that? 

2) On a somewhat unrelated note: Say I am a 100% owner of Corporation Y. What stops me from directing Corporation Y (assume Corporation Y wholesales or retails items I personally desire) to buy an item that I want for a certain price, say $500, and then selling it to me at a loss for, say $200? In doing so I would reduce the tax burden of Corporation Y by lowering the profit of the corporation. 

Intentionally selling things at a loss is obviously illegal, but it seems it would be easy to hide such a scheme. 

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2. Why wouldn't you just compensate yourself with the item instead of the cash that you were going to spend on the item. Pay yourself $200 less and give yourself the item instead. Seems cleaner. If it's your stuff (100% owner, meaning no shared stock ownership or what not), so it's yours and you just have to take the hit from not selling it to someone else for a profit. Just a way of getting the item at bulk price through your company and you don't make as much money for yourself by not selling it. Employee discounts are pretty common even for non-owners. They just don't do at a loss, but at cost, for obvious reasons.

 

Why is it obvious that selling things at a loss is illegal? Are you sure that it's even truly illegal to do that? Companies sell items 'at a loss' all the time when the alternative is not being able to sell them at all. They drastically mark items down and get what they can for them before they lose even more value. Not always what is done, but that's pretty common practice as well. Of course some companies would rather destroy their product then sell for a reduced price merely because of brand and other issues that come from selling at a lower price (that's a bit more complicated).

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