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Can you be a single member LLC even though you hire people to work for equity?

San Francisco, CA |

Would these people be considered IC?

And if so, you dont have to alter the operating agreement correct?

Attorney Answers 5

Posted

This is a state specific matter that could have significant consequences. You should consult a CA lawyer who is experienced in setting up LLCs.

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2 comments

John P Corrigan

John P Corrigan

Posted

This is not state specific at all......is primarily Federal securities and Federal tax laws which govern SMLLC's based on asker's questions.

Stephen Joseph Cipolla

Stephen Joseph Cipolla

Posted

I stand corrected by Mr. Corrigan. It is not exclusively state specific and the federal issues are paramount.

Posted

If they are receiving equity then it sounds like they would be becoming members in the LLC. At that point you would no longer be a single member LLC.

You may want to meet with an attorney to go over your plans in more detail and discuss how you are defining the "equity" that you are planning on giving out.

Legal disclaimer: I am licensed to practice law in the state of Washington and the answer provided above is for general information purposes only and should not be relied on as specific legal advice. This answer does not form an attorney-client relationship. You should consult with an attorney of your choice to fully advise you about your legal rights and obligations.

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Posted

If you have no experience issuing securities you should not do this without an attorney. Improperly issued securities (equity) can have very severe employment law and securities law reprocussions.

The above is general legal and business analysis. It is not "legal advice" but analysis, and different lawyers may analyse this matter differently, especially if there are additional facts not reflected in the question. I am not your attorney until retained by a written retainer agreement signed by both of us. I am only licensed in California. See also avvo.com terms and conditions item 9, incorporated as if it was reprinted here.

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Posted

There are different ways this issue could be addressed - most notably, different ways people could "work for equity".

A central question is when and how the equity interest is granted. if they work now and receive the equity interest later, then it is possible they would be independent contractors (at the beginning).

However, once an equity interest is granted, then, as Attorney Camm noted, the workers become members. At that point, the Operating Agreement must be updated accordingly.

Meanwhile, you need to ensure that whatever the workers' relationships to the LLC, they have signed agreements assigning to the LLC all rights to whatever they produce, including all associated intellectual property rights.

I agree with my colleagues that you should retain a lawyer to help you with this type of matter. The likelihood you can handle this properly on your own is somewhere near zero.

This information does not constitute legal advice and does not establish an attorney-client relationship.

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Posted

You could still be a SMLLC if the grant of "equity" is an option to acquire a membership interest or possibly phantom equity which has economic value but not same thing as legally being a member. What documents do you have in place already because you also need to understand that Sec. 83 of the IRC can have adverse tax results to the people you granted equity....depending on the type of equity (which you have not elaborated sufficiently). You are messing with complex areas so I strongly suggest you speak with a business/tax lawyer to figure out what you have done right and wrong in setting up your plan to share the wealth.

My answer is not intended to be giving legal advice and this topic can be a complex area where the advice of a licensed attorney in your State should be obtained. Please click "helpful" or "best answer" if my answer added any value or add a "comment" if you have more info for me to help you get a better answer.

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3 comments

Joseph Sampson Ford Jr

Joseph Sampson Ford Jr

Posted

Yes, I agree about that phantom equity. I have seen movie projects where the corporate structure is a single member LLC, but certain 3rd-party accredited investors receive an equity interest in the movie that essentially comprises 100% of the LLC's assets.

John P Corrigan

John P Corrigan

Posted

I use anlotmofmphantom equity in LTIP plans where the triggering event is a change of control transaction ...like an Internet company owned by 2-3 member's and they have 30 contractors writing code for the website and seeking a big pay day.

John P Corrigan

John P Corrigan

Posted

I hate my new iPad keyboard...sorry. A lot of phantom equity is my meaning.

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