Equity incentives are a valuable tool for business owners to attract and retain talent, but applying them is different depending on business structure. Understanding these differences will help you decide whether to form as an LLC or Corporation. If you’re interested in giving your employees equity incentives, consult an attorney before committing to this particular approach.
Employee Stock Options and Corporations
Corporations are a natural fit for employee stock options. Unlike LLCs, which are controlled by owners commonly referred to as members, corporations are beholden to stockholders. In a corporation’s articles of incorporation, the number of shares that may be issued at any point in time are identified. If you are interested in giving your employees and/or investors equity incentives, a corporate structure is the obvious choice.
LLC Profits Interest
Because LLCs cannot issue stock, equity incentives must generally be issued as profit interests. Unlike a profit share generated by a corporation, a profit interest generated by an LLC is grounded in an increase in value of the LLC over a specific time period. Vesting requirements may or may not be attached to such interest.
So while equity incentives are still possible with LLC’s, the approach to granting incentives is less obvious, more complex and more creative than it is under a corporate model. The LLC model will likely be preferable to you if you are uninterested in a strict corporate hierarchy of leadership, issuing stock broadly and remaining beholden to stockholders generally.
The process of creating equity incentives via profit interest is technical in nature. In order to better ensure that such interests are properly drafted, are enforceable and remain in compliance with relevant regulations, it is a good idea to consult an attorney before committing to this particular approach.
Consult an Equity Compensation Lawyer
If you are weighing these options, consider reaching out to an experienced equity compensation lawyer LawTrades to assist you. To-date, we have helped more than 5,000 startups navigate the legal processes of formation and registration, financing, recruitment, labor-based immigration, intellectual property protection and compliance. In addition to our extensive experience, we have crafted an approach that is not only efficient and effective, it is affordable as well. If you hope to turn your startup vision into reality, please turn to LawTrades for all of your legal needs.