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Equity Compensation for Limited Liability Companies (LLCs)
by Brian Hector, Daniel Janich, Alan Nadel, and Corey Rosen
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For many years, the most common advice on sharing equity with employees in a limited liability company (LLC) has been "switch to S corporation status instead." The argument was that it was too complicated to share equity in an LLC. Yet many LLC leaders want to share equity with employees and have very good reasons for retaining their company's status as an LLC. When we at the NCEO asked experts in employee ownership law if it were possible to share equity in an LLC, the usual response was "yes, but it is complicated." No one seemed to want to go into too much detail about just what these complications were, however.
This book exists so LLC owners and their advisors can finally get answers. It is, we believe, the only detailed exploration of equity compensation in LLCs available. The book starts with a general description of LLCs and an overview of the ways to share equity. Chapter 2 explores alternative approaches to designing plans. Chapter 3 provides more detail on the specific ways to share equity in an LLC, with a particular focus on tax issues. Chapter 4 describes the accounting issues. Chapter 5 describes equity sharing methods available in S or C corporations so readers can judge whether the broader range of choices for such corporations justifies switching from LLC status. Finally, the appendix provides a model LLC equity compensation plan, which is included in word-processing format on the book's CD-ROM.
This book exists so LLC owners and their advisors can finally get answers. It is, we believe, the only detailed exploration of equity compensation in LLCs available. The book starts with a general description of LLCs and an overview of the ways to share equity. Chapter 2 explores alternative approaches to designing plans. Chapter 3 provides more detail on the specific ways to share equity in an LLC, with a particular focus on tax issues. Chapter 4 describes the accounting issues. Chapter 5 describes equity sharing methods available in S or C corporations so readers can judge whether the broader range of choices for such corporations justifies switching from LLC status. Finally, the appendix provides a model LLC equity compensation plan, which is included in word-processing format on the book's CD-ROM.
Publication Details
Format: Perfect-bound book, 82 pages
Includes CD
Publication date: September 2009
Status: In stock
Contents
Preface
1. A Primer on Limited Liability Companies
2. Designing an Equity Incentive Plan
3. Equity Interests in Limited Liability Companies
4. Accounting for Equity Compensation in an LLC
5. A Primer on Sharing Equity with Employees in Non-LLC Companies
Appendix: Model Equity Compensation Plan for an LLC
1. A Primer on Limited Liability Companies
2. Designing an Equity Incentive Plan
3. Equity Interests in Limited Liability Companies
4. Accounting for Equity Compensation in an LLC
5. A Primer on Sharing Equity with Employees in Non-LLC Companies
Appendix: Model Equity Compensation Plan for an LLC
Excerpts
From Chapter 3, "Equity Interests in Limited Liability Companies"
As stated previously, there are two types of equity interests available in LLCs. However, as an alternative to the grant of an outright interest, LLCs can issue options to acquire either a capital interest or a profits interest. The advantage in doing so is that the grant of an option in such case is not taxable to the employee or to the LLC. An employee who exercises an option acquires an immediate interest in the underlying assets and future revenues of the LLC.The exercise of an option on a capital interest will result in taxable income for the employee and a deduction for the LLC. The amount of taxable income equals the excess of the fair market value of the LLC interest received over the exercise price, if any. At exercise, the LLC would also need to address the "deemed sale" issue discussed previously.
The exercise of an option on a profits interest would not be taxable for the employee or LLC if the safe harbor rules are satisfied. At exercise, the appreciation in value issue discussed above would also need to be addressed.
