llc, stockIf I own an LLC as the sole member and it’s currently taxed as a disregarded entity, can I issue stock?
I’m working on a product and have consulted a friend on some of the finer points of the product’s operation. The product itself is entirely web/mobile-based so I don’t need to raise any capital. What I’m trying to accomplish, though, is “paying” my friend with a percentage of interest so that if the product makes a bazillion dollars, he’s got an official association with his share.
He’s more than willing to just help out as a friend but I’d like to have all of this formally documented - just to make things easier if it does take off.
The reason I ask about the disregarded entity part is that the tax situation seems pretty simple if it’s just me. I’m mainly interested to see if the disregarded entity status is still an option if I decide to issue stock (as opposed to being required to become an S-Corporation).
Or - can I add a member at a certain percentage and the LLC still be taxed as disregarded? I’m pretty sure this is out of the question but just wanted to be sure.
The short answer is NO, LLCs do not issue stock. While LLC rules vary by state, I think this concept is universal.
You can make an official agreement between the LLC and your friend to provide some compensation based on success, without making him a member of the LLC. However, the tax effects would be different than with appreciated stock.
Not to disagree, but…
Being disregarded for tax purposes is no barrier to an LLC issuing stock. You wouldn’t have publicly traded stocks, sure, but you are more than free to draft Articles of Incorporation that set out ownership, voting shares, etc. Even with a 50/50 partnership, the LLC can be disregarded for federal tax purposes (check out IRS Form 8832). States follow suit and explicitly address ownership, voting rights, etc in their LLC laws.
The key is to have a well-thought out agreement, which generally means seeking counsel. You don’t want things to take off and then have disagreements over things that could have been figured out in the beginning.
Off the cuff, I wouldn’t recommend a compensation based on “success” - no matter how much time you spend in the beginning, it will probably be easy to debate what was meant. Agreeing to give a certain % ownership requires some care, but it can be relatively straightforward.
If you issue an ownership interest to your friend, the LLC will, by default, be taxed as a partnership for federal tax purposes, unless you elect to have the LLC taxed as either a C or S Corporation. Once you go into business with someone else though, it’s no longer a sole proprietorship and you’ll have to file some kind of business tax return, whether partnership or corporate.
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