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?
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 by Kurzon LLP is done pursuant to a validly executed engagement letter signed by a partner of the firm. Neither receipt of information presented on this site nor any email or other electronic communication sent to Kurzon LLP or its lawyers through this website will create an attorney-client relationship. As well, no such email or communication will be treated as confidential except as is required by law. No user of this website should act or refrain from acting on the basis of information on this site without seeking legal advice from counsel in the relevant jurisdiction. Kurzon LLP expressly disclaims liability with respect to actions taken or not taken based on the contents of this website. Under the New York Rules of Professional Conduct, Section 7.1, portions of this website may be considered attorney advertising. ============================================================================== IRS Circular 230 Disclosure: U.S. federal tax advice in the foregoing message from Kurzon LLP is not intended or written to be, and cannot be used, by any person for the purpose of avoiding tax penalties that may be imposed regarding the transactions or matters addressed. Some of that advice may have been written to support the promotion or marketing of the transactions or matters addressed within the meaning of IRS Circular 230, in which case you should seek advice based on your particular circumstances from an independent tax advisor. ==============================================================================
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.