Ownership without investment. Help


2

I started work at a company a few months back. I was brought in to head up a new division in the company. That division is separating as it's own LLC. I won't be investing any money into the new company but will be granted 15% ownership in the company due to sweat equity and being a part of the startup at inception.

What are the upsides and downsides for me of this type of partnership; in terms of liability and taxes?

LLC Equity Tax Liability

asked Feb 2 '13 at 02:43
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Jane
11 points
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2 Answers


2

Answer is written assuming you're in the US. If you're elsewhere - laws are different and this may not be valid.

LLC's don't distribute dividends, unless they're explicitly electing to be taxed as C-Corp. Assuming your LLC doesn't make such election (not much sense doing LLC then anyway), the tax situation is different.

  1. You're not getting salary or dividends. You're a partner in the partnership and getting "guaranteed payments " and distributions. This affects the payroll deductions and benefits you can have. Talk to a tax adviser.
  2. LLC's don't have shares. They have membership interests. These interests can be for losses, gains, and assets, and they don't have to be the same for each. You can have 15% of gains, but 50% of losses, while 0% of assets. It all flows down to your personal tax return. Its all written down in the Operating Agreement you're going to sign. Talk to tax and legal advisers on this.
  3. From (2) also follows that it is very difficult to "sell" your "shares" in that LLC. LLC interest can only be transferred according to the terms in the operating agreement. Again, talk to a lawyer.
  4. Liability is limited. The difference between LLC and partnership is that there's no General partner in LLC - liability is limited for all the members, including the managing members. That of course doesn't include your liability for your personal actions, talk to a lawyer.
  5. You'll have to pay SE tax on your income (follows from (1)), and will need to check if estimates are in order. Talk to the tax adviser about that. Since you're not being a salaried employer, the LLC won't have to withhold your taxes, you'll have to deal with that yourself.

There are many other pitfalls, and of course benefits. Talk to a professional about all of this, making the right choices now can be very important later on.

Good luck.

answered Feb 2 '13 at 05:09
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Littleadv
5,090 points

-1

You should receive 15% of any dividends declared which you will have to pay tax on. The first "L" in "LLC" implies that you will have limited, i.e. very little, liability, but the specifics depend upon your jurisdiction.

In general, it is good news, although if the board doesn't elect to distribute profits (if any) as dividends, your 15% of zero isn't worth anything.

answered Feb 2 '13 at 03:59
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Steve Jones
3,239 points
  • Not distributing profits is not necessarily bad. But doesn't she have 15% voting rights on the matter? – Joe A 8 years ago
  • This is wrong. There are no dividends in LLC, and 15% doesn't necessarily mean 15% of distributions. See my answer for details. – Littleadv 8 years ago
  • Thanks for the clarification, @littleadv. US LLC is evidently not like UK/EU Ltd, more like LLP (limited liability partnership). – Steve Jones 8 years ago

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