Ask HN: Can an LLC contractor receive stock options from a startup? | Hacker News Reader

Ask HN: Can an LLC contractor receive stock options from a startup?

2 pointssowbug3 comments

Background: I recently survived a serious illness. At the time I was self-employed. Fortunately COBRA covered my family from my last job, which is why I'm not bankrupt. Today, I can't get individual health insurance. Once I disclose my health history, insurers pretty much hang up the phone. So I formed a California LLC with a group health plan and hired myself and my wife as managers. As long as I work for this LLC, I shouldn't have to worry about health-care coverage.

I've since gotten a few informal offers to join startups. As with most Valley software startups, a large part of implied compensation would be through stock options. I'm thinking of moving forward with one, but I don't want to abandon my LLC. It seems like these are my choices:

1. Keep the startup and the LLC separate. Join the startup as an employee, then maintain the LLC in my spare time. Hope that nobody (IRS, state tax agency, my group health plan) hassles me about the legitimacy of the half-asleep LLC.

2. Join the startup as the LLC's contractor. Take all compensation in cash, no stock. Cry when the startup is acquired in a couple of years.

3. Join the startup as the LLC's contractor. Arrange compensation exactly as it would be for an employee: some salary, lots of stock.

My preference is #3. But can an LLC receive stock options? Is this an unusual thing to do? Do you personally have experience joining a company as a contractor but receiving both cash and equity as compensation?

Approaching from another angle: are the fears I express in #1 well-founded? Have you heard of an LLC or corporation getting penalized in any way for, uh, not trying very hard?

An LLC is normally not prohibited from having stock options. It is an entity just like you the person.

However, most likely the company giving you the job will not be able to hire you through your LLC for a period more than a year. This is usually the time period the IRS would rule that you are an employee of the hiring company. This isn't a hard rule however, but a general interpretation. You would of course need cooperation from the company's owners as they may not like having you as an LLC. Even so, there are many people acting and working like employees that are being paid through their own companies.

It will probably be easiest for you to join the new startup as an employee and keep your LLC group coverage. Be careful that you are not eligible on two group policies as in some cases they could cancel each other out. Also try to maintain some income to the LLC to show it is actually trying to make some money and is not a shelter for your hobbies. At least enough to cover expenses.

Also, there is always hope you can again get insurance. Try posting your specifics on this agent forum and see what your options are:

www.insurance-forums.net

I didn't know about the no-more-than-a-year guideline -- that's fascinating. Is the purpose of the rule to protect the worker from being perpetually denied benefits that he'd otherwise get as an employee? If so, that's too bad, because in this case the worker wants to remain a contractor!

And thanks for the advice on not being covered twice. I'll be careful about that if it comes up. If I were offered health coverage as part of my employee compensation, I hope I'd be able to negotiate it into extra cash instead.

Your new employer can be held liable for employment taxes, plus interest and penalties, if a worker, you, is incorrectly classified as an independent contractor and paid via your LLC. The penalties can be reasonably high.

The IRS definition is here:

http://www.irs.gov/businesses/small/article/0,,id=99921,00.h...

There will also be a state definition to consider.

The one year period isn't a rule but more of a generally accepted guideline.

You can get around most of these in your contract with the hiring company and your LLC, but again will need their cooperation to properly structure the relationship to minimize their risk of losing an audit. It's really a bunch of hoops for them to jump through to get you on-board. If it were my company, it would be unlikely that I would go through the effort unless you were a key man.

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