If non cash rich billionaires have to sell stocks to pay taxes how do they stay in control of their companies?


If non cash rich billionaires have to sell stocks to pay taxes how do they stay in control of their companies?

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They usually avoid selling and take loans on the shares. Or strategically sell them. Like when Elon was selling in December he was exercising options at the same time.

You pay taxes on income, not wealth. Tax the rich only works if they take a salary or sell stocks.

The simple answer is they don’t sell stocks. The rich man’s game is to be cash poor and asset rich. That way, there are hardly any taxes to pay in the first place.

Firstly most billionares do not pay taxes. Only income is taxed and as long as they do not have any income on paper they do not pay taxes. It does not mean that they are not able to enjoy their wealth but it is done through various ways which does not involve any income.

One common way to raise cash without selling stock is to take up loans using the stock as security. If they default on the loan the bank will get the stock. So on paper they will be in massive debt. This does allow them raise funds for things like luxury trips and even the little taxes they might pay. This is by the way how Musk just got the money to buy Twitter.

But even considering this there are valid reasons for parting way with stock in a company. One common way is to raise funds for the company to expand. So it is not that uncommon for a “founder and CEO” to own less then 10% of their company. But as long as the other investors have faith in them and trusts them they can retain control over the company. However there have been situations where people have lost control over their own company. Most public was when Steve Jobs was fired from Apple by the other investors, he did eventually get hired again after a few years though.

What I cannot for the life of me understand is how can someone be bankrupt and at the same time a billionaire?

Sometimes there are different classes of stock. Class A shares, for example, may have 10 times the voting power of the Class B shares but the same economic rights (equal dividends). I think this was the case with Google before it became Alphabet.

Basically the “owner” can retain control but still have their pro data economic interest.

I didn’t see this mentioned, but they sell other stocks they own. They don’t only own one stock. While they might have a controlling interest in one company they own many other stocks. So on top of doing things like taking out loans against the stock of the company they have a controlling interest in, they can also sell other stocks for companies they don’t have a controlling interest in.

Income is taxed, not assets. If you earn $1M in income, you might pay $300k of that income in taxes leaving you with $700k of net income. So there’s usually no need to sell off stocks to pay taxes. Additionally, they usually only sell off a small portion of their stocks, which doesn’t really endanger their control of the company.

Almost none of the billionaire company founders hold 50% of their company shares… between co-founders, VC investors early on, shares sold in IPO, founders may remain the largest single shareholder but rarely have anything close to a majority of shares in their company.

However, they don’t pay taxes on shares they still own. Part of the reason billionaires pay so little tax relative to normal people is that they are only taxes on capital gains, when they sell shares.

Most company-founder billionaire types can just sell a tiny fraction of their shares to fund living expenses, without reducing their holdings too much. If somebody’s worth $5B and sells off $50M of shares, that’s 1% of their shares.

But many wealthy just borrow from lines of credit against their shares, delaying any sort of share dilution or tax implications.

So I’m going to explain to you how to do this with real numbers. As some others have said you use loans and pay **almost** no tax.

Let’s say I start a company. Things go well and we go public. I now own 25% of the stock worth 50 billion. 25% is **more** than enough for me to stay in control, so I sell 10 billion in stock. This lets me keep 40 billion or 20% again this is more than enough for me to stay in control. I have to pay 20% capital gains on the 10 billion I sold, so 2 billion. I now have 8 billion in cash.

Now forget about the 40 billion I have in the company it’s not important. All it does is let me retain control. The 8 billion is what matters. I invest this 8 billion is a diversified portfolio. I then get a loan on this 8 billion for about 30% of it so 2.5 billion for a stupid low interest rate. Zuckerberg apparently got about 0.5% when he did this. 0.5% on 2.5 billion is 12.5 million a year. Let’s say I’m 35 if I want to spend 1 million a week 2.5 billion will last me 48 years. or until I’m 83. How do I pay the interest? Well my 8 billion is still there. Making about 3% a year. 3% of 8 billion is 240 million. Every year I sell 15.7 million of that 8 billion+ pay 3.2 million in tax and use the rest to pay off the interest on the loan. So ignoring the 40 billion in my company I “make” 240 million a year and get taxed 3.2 million. That’s a tax rate of 1.3% At 83 my 240 million a year will be well over 20 billion, So I just take out a new loan that covers me till I die. When I die the base points reset my kids pay off the loans with 0 tax owed, they actually get a deduction on the inheritance tax for repaying the loan. Rinse repeat.

They stay in control as a business executive (CEO, president, etc.) Also they retained plenty of shares of stock so they also have input as a shareholder.

You could avoid selling by taking out a loan against your shares to pay taxes

Also you can have “preferred” shares which are worth the same as regular shares in terms of ownership of the company, but can decide those shares get to vote (for instance) 1000 times each in order to maintain voting control of the company even if you own fewer than 50% of the outstanding shares.

Lots of different ways:

* Many companies have different classes of shares (voting and non-voting). So a founder can sell off non-voting shares and still have majority voting control.
* They also don’t need to own >50% of the company to be calling the shots. The important part is that no one has more shares than them. A lot of founders (Gates, Jobs, others) have/had single digit ownership in their own companies while being firmly in control.
* They can sell shares of other companies they own, or pay taxes using other cash, or just borrow money (using their shares as collateral).

You only have to pay taxes if you make income, for example from selling stock. If you just never sell, then you don’t make any income from those stocks, so you don’t have any taxes to pay. You might have some other income from dividends or salaries that don’t require you to sell shares. Since this income is just cash, you just reserve a portion of that cash to pay taxes.

Unrealized capital gains are untaxed*, meaning that the profit is only taxed when they sell stock. Any stock sells they perform will be planned with taxes in mind, and for day-to-day expenses they will either have enough money saved** or take loans against the shares at low interest rates.

Many will have taxes due from dividends even if they do not sell stock, however the dividends are typically paid in cash and the tax rate is always less than 100%.

Many others are employed by the companies they own, often in an executive position or on the board of directors. For these positions, they will often be paid a salary*** and bonuses, which are nearly always taxed. The bonuses are often paid in stock, which may require they sell some stock to cover the taxes, however the amount they are required to sell for taxes will be less than what they gained.

* I am not aware of any jurisdictions that tax them, but there are a lot of jurisdictions in the world, and it would not surprise me if there is an exception.

** “Cash poor” may still mean hundreds of thousands in cash or extremely liquid assets.

*** A lot will arrange a formal salary of $1/year – just enough to be able to legally be an employee for tax reasons, both for the company and the employee. The vast majority of their compensation generally comes from stock options and performance bonuses.