

Startup, Inc - What You Need to Know Before Starting a Company - mattjung
http://www.readwriteweb.com/archives/startup_inc_starting_a_company.php

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tptacek
The big issue with LLC's is that you technically can't be a W2 employee of one
_and_ hold equity in it; stakeholders in an LLC are all principals, and have
to be compensated through distributions.

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tstegart
What problem is there with that?

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tptacek
For founders, none. Early on, distros make sense.

For employees, lots. Employees want W2 wages. They don't want to pay quarterly
estimated taxes and they want the company to pay its share of payroll taxes.

The sense I get is a lot of companies here don't foresee having "employees",
at least until after their hoped-for A round closes. OK. Switching to a C corp
from an LLC isn't that big a deal, as long as none of the founders have left
by then.

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ajross
I'm not sure what the problem is here. I worked as a salaried employee (in
California) for an LLC from 1998 to 2001 (after which it incorporated). I got
a ton of restricted stock options at a near-zero strike price, as was the
custom at the time. Certainly an LLC can hire people and give them equity
(options, in this case).

Either laws have changed, or maybe you've misinterpreted?

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tptacek
It's very possible I've misinterpreted the advice we got from our legal and
our accountant, but my current understanding is, you cannot simultaneously be
a "member" of and and "employee" of a limited liability company, according to
IRS rules.

An LLC doesn't have "owners", only "members", so any equity stake you have in
one technically makes you a member.

There very likely are trivial ways around this, and I'd be interested in
hearing them.

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tptacek
I did take 5 minutes to research this; you can find lots of web pages talking
about the issue --- here's a good one:

<http://library.findlaw.com/2001/Jan/1/126651.html>

But I didn't find anything directly applicable at IRS.gov, except for the
obvious one:

<http://www.irs.gov/faqs/faq-kw132.html>

An LLC is effectively a partnership with limited liability (it's a corporation
with partnership-style pass-through taxes), and the IRS rules on owners vs.
employees for partnerships are very clear.

Again: equity is ownership; LLC's don't have "owners", they have "members".

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matt1
Just want to say that as someone who is just getting into this arena, this was
a very helpful article.

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DenisM
This is good background but not entirely accurate. Make sure to talk to a
lawyer.

