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

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.

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Attorney answers 3

Posted

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 set of unique circumstances that cannot be adequately addressed without consultation. You are strongly advised to hire an attorney licensed to practice law in your state to represent you.

Posted

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 relied upon in place of an actual consultation with an attorney. Mr. Boone is licensed to practice in Massachusetts, before the U.S. Tax Court, and the Federal District Court of Massachusetts. Most initial consultations are free. Further information is available on my profile and at www.boonehenkofflaw.com.

Asker

Posted

Thank you so much for the information, Mr. Boone. It is truly appreciated.

Posted

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. Mr. Geffen is licensed to practice law throughout the state of Texas with an office in Dallas. He is authorized to handle IRS matters throughout the United States and is licensed to practice in US Tax Court as well as The Court of Claims. This answer is provided as a public service and as a general response to a general question, it is not meant, and should not be relied upon as specific legal advice, nor does it create an attorney-client relationship.

Asker

Posted

Thank you so much for the clarification, Mr. Geffen.

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