Given part of an LLC. What are my likely tax implications once it is valued?

Asked over 1 year ago - Dallas, TX

I am being given (as a key employee) 5% of an LLC in the run up to it being valued at $20 million during a round of investment.

If my basis is 0, am I liable for capital gains on $1m?
If my basis is $1m, I presume I will receive a W2 for that amount?

Which neatly brings me to my primary question: not being a wealthy individual at all, how on *earth* will I be able to deal with a tax situation like this?

Some general pointers would be very much appreciated. I also need to seek formal representation from a tax attorney, so if you are in Dallas, TX, charge reasonable rates and have experience with these matters, please do drop me your details.

Attorney answers (3)

  1. Robert Neil Newton


    Contributor Level 16


    Lawyers agree


    Best Answer
    chosen by asker

    Answered . You should really speak to a tax attorney, CPA, or maybe even a business attorney if you have the type of relationship with your employer that would allow you to introduce alternative concepts. The way you receive the stock will largely depend upon your tax treatment. For instance, if you receive options, which are not stock at all until exercised, you would receive different treatment. Within options, there are two main types, non-qualified stock options and incentive stock options. ISO's are usually the best for the common employee, but not always.

    Otherwise, you would need to know the value of the stock today, what type of stock is currently outstanding, and what type of stock they are selling to investors. This is important because you would probably be receiving some type of common stock, which is typically much less valuable than the preferred stock that is typically sold to investors.

    Finally, if your stock would vest over time, then it is called restricted stock. This is very common for employees who receive actual stock instead of options (and even for options). If so, then you should strongly consider making an 83b election that allows you to pay the tax today on the stock, which will hopefully be considerably less (possibly next to nothing). Otherwise, you must pay the taxes on the value of the stock at the time it vests. If the company's valuation increases over time, then you will have to pay tax on the value of the stock at the time it vests.

    You are strongly advised to seek the advice of a CPA or attorney for further personal assistance regarding your exact incentive structure.

    The above statements are provided as general information and not intended as legal advice. Each matter has its own... more
  2. Arthur Harold Geffen


    Contributor Level 17


    Lawyer agrees


    Answered . Mr. Boone is correct if the value of the stock is 0 when you receive it. If it is worth a million then there will be tax consequences. As a practical matter, since i have been involved in these types of transactions in thee past, it is unlikely that the stock will have significant value when you receive it. So if and when you sell it, which is another altogether different issue, that is when you will have taxable gain.

    Hope this helps. If you think this post was helpful, please check the answer was a good answer tab below. Thanks.... more
  3. Jefferson W. Boone


    Contributor Level 14


    Lawyer agrees


    Answered . If you were issued a W-2 (which you won't be), taxes would be withheld. The basis of your holding is somewhat complex, and should be discussed with a local tax expert, whom you will probably have to pay (not too much). You would not have any capital gains taxes to pay until you "realized" the gains, e.g., sold the stock. Accordingly, you wouldn't have to pay any taxes until you had the wherewithal to pay them. Best I can do off the cuff. Consult a local expert. Enjoy the fruits of your labor.

    The foregoing answer does not establish an attorney client relationship, is not confidential, and should not be... more

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