Maria Has Been Operating a Business as a Sole Proprietorship

question 8

Essay

Maria has been operating a business as a sole proprietorship for several years. She needs additional capital and wants to incorporate her business. The assets of her business (building, land, inventory, and so on)have a $400,000 adjusted basis and a $1.5 million FMV. Maria is willing to exchange the assets for 1,500 shares of Metro Corporation stock, each having a $1,000 FMV. Bill and John are each willing to invest $500,000 in Maria's business and will each receive 500 shares of stock. Why is Sec. 351 important to Maria? Does it matter to Bill and John?

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Definitions:

Business Expense

Monetary outlays or costs that are necessary for a company to operate and conduct its business activities.

Leasing Arrangement

A contractual agreement where a lessor allows a lessee to use an asset in exchange for periodic lease payments.

Encumbered Assets

Assets that are used as security or collateral for a loan or debt, restricting their free use or disposal by the owner.

Secured Borrowing

A type of loan in which the borrower pledges an asset as collateral for the loan, which the lender can claim if the loan defaults.