From Incorporation to Tax Season: Your 2024 Ultimate Equity Compliance Guide

Introduction

Navigating the complex compliance landscape can seem intimidating and involves significant time and budget. This guide is your roadmap to understanding some of the key deadlines and essential compliance requirements that your business might need, ensuring you are well-prepared for 2024.

Your compliance guide: critical milestones in your business’ calendar

1. Ensure you meet this crucial deadline after incorporation, whether your entity is newly established or has been in existence for some time.
2. Raising capital from investors? Know your legal obligations.
3. Onboarding new talent? Hire with confidence and the right equity structure.
4. Preparing for audit or tax season? Consider these relevant scenarios for your business.

Disclaimer: This document is intended for general informational purposes only and should not be construed as legal, tax, or accounting advice. It is important to consult with your legal, tax, and accounting advisors for specific guidance, as it may not encompass all applicable requirements for your business.

1) Ensure you meet this crucial deadline after incorporation, whether your entity is newly established or has been in existence for some time.

File Beneficiary Ownership Information (BOI) report with FinCEN

Effective January 1, 2024, the Corporate Transparency Act (CTA) mandates that both existing and newly formed corporations and LLCs file a Beneficial Ownership Information (BOI) report with FinCEN. This is crucial for identifying key stakeholders and decision-makers in the company. Failure to comply may result in severe consequences, including criminal charges, fines up to $500 a day, and imprisonment.

Due: Calendar and event-based deadlines

• Entities formed before January 1, 2024: File the BOI report before January 1, 2025.
• Entities formed on or after January 1, 2024: File within 90 days of formation.

Who does this apply to?

The CTA requirements extend to:

• Domestic entities: Corporations (C-Corps) and Limited Liability Companies (LLCs) are required to file a Beneficial Ownership Information (BOI) report.
• Foreign entities: C-Corps or LLCs that are registered to do business in any U.S. state are also required to file a Beneficial Ownership Information (BOI) report.

• The Reporting Rule specifies twenty-three (23) distinct entity types that are not subject to this reporting obligation, as detailed in the Small Entity Compliance Guide issued by the Financial Crimes Enforcement Network (FinCEN).

Helpful links

• The Corporate Transparency Act: A Practical Guide for Founders, Investors, and Business Operators

File BOI with Pulley

Review, authorize, and submit electronically your BOI report with our secure, user-friendly, and compliant flow directly from the Pulley platform. 

2) Raising capital from investors? Know your compliance obligations.

2.1) If you’re issuing equity to investors, here’s how you stay compliant:

Securing your board’s consent when fundraising

Whenever a company decides to fundraising using SAFEs (Simple Agreements for Future Equity) or convertible notes, obtaining your board’s consent is a crucial step. 

Due: Event-based trigger

• Whenever new convertible options terms are issued (e.g. SAFEs, convertible notes, etc.).

Who does this apply to?

• Startups and companies in fundraising activities.

Helpful links

• How do I issue a board approval for options on Pulley?
• How to E-sign Board Approvals in Pulley
• Why am I getting a Pulley alert for my SAFEs not being compliant?

Requesting and signing a unanimous board consent through Pulley

Pulley flows are designed to help you remain compliant when issuing new equity. Issue, track, and request signatures for all your board consents in one place.

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3) Onboarding new talent? Hire with confidence and the right equity structure.

3.1) If you’re issuing equity to employees as part of their compensation, make sure to follow these steps:

Create an Equity Plan

Set aside shares to be issued to employees as equity compensation and adopt a formal equity plan. This can have tax benefits for both employer and employee.

Due: Event-based

• Set up before issuing any equity.

Who does this apply to?

• Applicable to all companies offering equity to employees.

Helpful Links:

• What is an Equity Plan?

Manage your equity plan with Pulley

Pulley’s platform makes managing equity plans efficient and compliant. Pulley gives you basic equity plan and board approval templates so that you can set up an equity plan within minutes.

Get 409A valuations whenever you issue stock options

For companies offering stock options to employees, obtaining a 409A valuation is a critical step to ensure compliance with IRS guidelines and to accurately determine the fair market value of these options.

Due: Calendar and event-based deadlines

• Before you issue your first stock options for employees
• At least once every 12 months or after a material event

Who does this apply to?

• Private companies issuing stock options.

Helpful links

• When do I need to get a 409A valuation?
• What information do I need to submit to get my 409A valuation?
• How are 409A valuations done on Pulley?

Request 409A valuations with Pulley

Get accurate and audit-compliant valuations from our team of in-house experts in as little as five business days or less. Pulley’s in-house valuations are tailored to your needs and fully integrated into your cap table. Learn more.

Comply with Rule 701 when issuing equity to employees

Rule 701 is a federal safe harbor exemption most commonly used by startups to issue stock options to employees, advisors, directors, or consultants. Under Rule 701, private companies are permitted to issue up to a certain number of options during a consecutive 12-month period.

Due: Event-based deadlines

• Consider using this exemption when issuing equity to employees, advisors, directors, or consultants.

Who does this apply to? 

Often utilized by private companies when issuing equity compensation to employees, directors, consultants, and advisors.

For a non-reporting company of any size to rely on the exemption provided by Rule 701, its total sales of securities over a consecutive 12-month period must be below a certain threshold:

• The aggregate sales price sold under Rule 701 is less than $1 million
• The aggregate sales price sold under Rule 701 is less than 15% of the total assets of the issuer, measured as of the date of the issuer’s most recent balance sheet; or
• The number of the issuer’s securities sold under Rule 701 is less than 15% of the outstanding amount of the common shares, measured as of the date of the issuer’s most recent balance sheet.

Helpful links:

• What Is the Rule 701 Exemption?
• What is Rule 701?

Use Pulley to check for Rule 701 compliance

Pulley has a Rule 701 calculator that makes it easy to check if your securities qualify for the Rule 701 exemption. To find it, just Select Compliance > Rule 701 in the left-hand taskbar on Pulley.

3.2) If you’ve issued equity compensation to employees, here’s how to expense equity awards on your financial statements:

Manage equity award expenses under ASC 718

ASC 718 provides the guidelines for expensing stock options and other equity awards in your financial statements. 

Due: Event-based deadlines

• Whenever you’re doing financial reporting that needs to be compliant with the generally accepted accounting principles (GAAP) (often at the end of a fiscal year)

Who does this apply to? 

• Whenever you’re required to have GAAP-compliant financial statements. Many companies choose to start compiling GAAP-compliant financials around their Series B round.

Helpful Links:

• What Is ASC 718?

Compliance with Pulley: Soon you will be able to generate the relevant tables and footnotes with our platform, following ASC 718 guidelines. In the meantime, reach out to support@pulley.com if you’re interested in generating a formal ASC 718 report.

4) Preparing for audit or tax season? Consider these relevant scenarios for your business.

4.1) If an employee exercised an incentive stock option (ISO) in the last tax year, you’re required to file these forms:

File Form 3921 for exercised ISOs

If any employee exercised an incentive stock option (ISO) in the last tax year, you're required to file Form 3921. In addition to distributing Form 3921s to employees who exercised ISOs, a company needs to file Form 3921s with the IRS. Failure to do so in a timely fashion could result in significant tax penalties.

Due: Calendar-based deadlines

Annually, whenever an employee exercises an incentive stock option ("ISO") in the previous tax year:

• January 31 - Furnish copies of Form 3921 to relevant employees.
• February 28 - Paper filing of Form 3921.
• March 31 - Electronic filing of Form 3921.

Who does this apply to?

Companies whose employees have exercised ISOs.

Helpful Links:

• What is a Form 3921?
• What do I do with Form 3921?
• Generating Form 3921s in Pulley
• Form 3921 from IRS

Generate Form 3921 with Pulley: Pulley helps facilitate the electronic filing of Form 3921. Just follow these step-by-step instructions.

4.2) Some employees may enjoy tax savings by filing an 83(b) election:

Optimize tax savings with an 83(b) election

An 83(b) election allows employees to potentially reduce tax liabilities on certain securities, most typically restricted stock awards (RSAs) and early exercised options. An 83(b) election allows you to pay taxes on your shares on the date of the acquisition rather than the date the shares vest. A Section 83(b) election involves sending a concise letter to the IRS, detailing your preferred taxation method for your equity.

Due: 

The election statement must be filed with the IRS no later than 30 days after the date the grantee receives their shares or exercises their options.

Who does this apply to? 

• Employees who receive certain forms of equity as part of their compensation.

Helpful Links:

• What is an 83(b) Election?
• What Is the Section 83(b) Election? A Guide for Startup Founders
• Find the 83(b) form here

Filing support with Pulley: Pulley generates 83(b) elections for early exercise options. 

Always consult with your tax advisors at the time of option exercise or restricted stock grant to determine whether it is appropriate to file an 83(b) election and whether Spousal Consent is required for your 83(b) election.

Conclusion

With this guide, you've gained insights into managing key compliance aspects of your company, from incorporation to fundraising, equity compensation, and tax preparations. 

By understanding and adhering to these guidelines, you can ensure that your business not only stays compliant but also operates more efficiently, saving both time and money. Compliance is an ongoing process, and staying informed is critical to your success. 

Use this guide as a resource to revisit as your business grows and evolves, ensuring that compliance remains a cornerstone of your sustainable growth. 

If you have any questions or need personalized guidance, our team is here to assist you. Don’t hesitate to reach out and book a call with our team.

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‍Disclaimer: This document is intended for general informational purposes only and should not be construed as legal, tax, or accounting advice. It is important to consult with your legal, tax, and accounting advisors for specific guidance, as it may not encompass all applicable requirements for your business.