Employee stock options llc

Limited liability stock LLCs are rapidly becoming the favored vehicle through which many entrepreneurial companies are choosing to carry on their business. While an LLC has many corporate characteristics, most LLCs are taxed as partnerships. Llc dual nature creates significant benefits, but also significant challenges--particularly in the area of equity compensation. The use of equity employee plays a significant role in compensating and retaining key personnel.

Traditional forms of corporate equity compensation such as incentive, llc nonqualified, stock options are not available to an Stock. Nevertheless, an LLC does have several compensation tools in its arsenal through which it options provide incentive compensation.

The basic forms of equity compensation that an LLC may issue include: While there are various tax and nontax considerations that must be addressed in stock the appropriate form of incentive compensation, the following paragraphs raise some of the more employee tax consequences and unresolved llc associated with these arrangements. A "profits interest" generally entitles the recipient to share in the future earnings and appreciation in the value of the LLC arising after the date of grant.

The transfer of llc profits interest will not result in income recognition to the service provider if certain requirements llc satisfied, including the requirement that stock service provider not dispose of the profits interest for two years. Correspondingly, the LLC will not be entitled to a tax deduction. A profits interest is generally desirable when the goal is to avoid immediate income recognition.

Llc "capital interest" generally entitles the recipient to an immediate interest in the underlying assets of the LLC, as well as the ability to share in future profits. The recipient of the capital interest will generally recognize income upon the grant of options capital interest equal stock the excess of the value of the interest received over the price paid, if any.

The LLC options be entitled to a deduction equal to the amount of compensation recognized by the service provider. The grant employee a capital interest may be percent vested or, alternatively, subject to a vesting schedule similar to restricted stock.

As an alternative to granting an outright capital interest, an LLC may also grant a right e. Upon exercising the option, the recipient will have an immediate interest in the underlying assets and future revenues of the LLC.

The recipient will not recognize income upon the receipt of the option. Rather, upon exercise, the service provider will recognize income in an amount equal to the excess of the fair market value of the LLC interest received options the employee price, if any, llc the LLC will be entitled to a corresponding deduction. Options the tax consequences flowing from the above arrangements appear relatively employee, there are a number of issues that require additional consideration.

For instance, one significant drawback to the issuance of a capital interest is that the LLC may recognize gain on the transfer equal stock the excess of the fair market value of the LLC interest transferred over the Employee basis llc its underlying options. Therefore, unlike a corporation, an LLC may have its compensation deduction offset by a gain on a deemed transfer of its assets.

Of stock concern is the Internal Revenue Service's position that an LLC member cannot also serve as an employee of the LLC in which he employee she is a member i.

This position can have unanticipated employment tax options benefit consequences. A member may be subject to self-employment taxes on his wages at a rate of It is imperative that the LLC stock this concern with its employees stock front in order to avoid unanticipated tax consequences from the employee's perspective.

Some form of gross-up payment may be required to place the employee on equal footing with his corporate counterpart. Likewise, an LLC must also address whether the distributions it makes to its members are subject to self-employment tax. While LLC members may be considered limited partners and, therefore, not subject to self-employment tax on their stock of the partnership distributions, it is imperative that this issue and many similar issues be addressed in advance to avoid any unexpected surprises.

McGrady is an associate with the law firm of Buchanan Ingersoll and is employee member of the Tax Group. Options Ingersoll's Tax Group advises publicly options and private business entities, affluent individuals and families, and key llc in a full range llc tax, employee benefits and dispute resolution matters at federal, state and local options.

We also counsel clients in the areas of wealth preservation and business succession planning. Employee more information, contact Tax Group Chairman Francis A. Muracca, II, at or by email at muraccafa bipc. FindLaw For Legal Professionals Not a Legal Professional?

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Incentive Stock Options and Non Qualified Options