Minimizing Tax Impact on Member-Managers in Converting from a DE LLC to DE C-corp

Asked over 1 year ago - New York, NY

We're a 15-month old DE LLC. My co-founder and I are the only members/managers of the LLC (we funded it). Never memorialized our structure/arrangement, so fair to say we own 50% each of the LLC outright. Neither one of us made an 83(b) election. Biz has done well but no revenues or other clear valuation makers yet.

We're now discussing seed financing and investors want us to convert to C-corp. They also want to restrict majority of our ownership to time-based vesting.

How should we structure+sequence (i) conversion, (ii) putting vesting on founder shares, (iii) 83(b) election, (iv) creating option pool for future emplys, and (v) bringing in new money/investors, so as to minimize/eliminate out-of-pocket taxes for the founders (also audit risk) due to this conversion & related steps?

Attorney answers (2)

  1. John P Fazzio III


    Contributor Level 16


    Lawyers agree

    Answered . This is a complicated question. As you must already be aware, the 83(b) election must be made within 30 days of the stock purchase date. Whatever you do, you want to make sure you do not miss the window for making that election. You have a few options on the conversion, but by far the most common choice would be to create a Delaware C-Corp and merge the LLC into the Delaware C-Corp. To structure the transaction to avoid tax, there must be a pro-rata distribution of C-Corp shares to the founders in proportion to your LLC capital account ownership (50/50). Founder shares could vest over 3 to 4 years to defer income.

    In order to generate funding dollars you have to choose your poison. If traditional (and cheap) debt funding will not be sufficient, you will have to go with relatively more expensive equity and Private Equity firms and Venture Capital firms exact a heavy toll. You can create an employee stock option plan contemporaneously with these other steps, but that is a lot to tackle all at once.

  2. Jeffrey Mead Kurzon

    Contributor Level 9


    Lawyers agree

    Answered . You need an accountant or a tax lawyer for sure. After getting advice from them, a corporate lawyer would be able to do the work for you. Or you can hire a corporate lawyer and ask that they work with an accountant or tax lawyer for you.

    Please note that this answer is not intended to serve as legal advice for any purpose. All legal advice rendered... more

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