LLC Equity Raise Founder Fees (2024)

FAQs

Can an LLC raise equity? ›

However, raising or obtaining external capital for LLCs can be done through the offer of equity or debt. An individual or entity has LLC equity when they buy an ownership percentage of the company, which entitles them to a certain amount of the profits, and thus they can contribute to decision-making.

Whatever may be your rationale, you want to know if it is something you can do with your Limited Liability Company; and the answer is yes. Therefore, you can give away your LLC's equity. However, you need to consider factors and challenges that affect this decision.

No matter what type of business you run—a manufacturing company, a brewery, a software firm—you can offer your employees equity and still take advantage of all the benefits of an LLC. In fact, equity incentive plans for LLCs are becoming more common, and there are several types of equity plans LLCs can choose from.

There are four common methods of granting equity or equity incentives in an LLC: (1) outright membership interest or membership unit grants, (2) LLC incentive units (aka “profit interests”), (3) a phantom or parallel unit plan (aka. synthetic equity), and (4) options to acquire LLC capital interests.

Fundraising for an LLC

LLCs, as I mentioned a little bit earlier, are often unattractive to tax-exempt venture fund investors because their investment in a flow-through entity like a limited liability company can produce unrelated business taxable income.

Equity raising is when a company raises funds by issuing new shares. This allows the investor to take partial ownership in the business and, unlike with debt, the funds raised do not have to be repaid.

Perhaps counterintuitively, founders of a company do not automatically own equity in it. Instead, they purchase their shares (often described as “founder stock”) from the company shortly after incorporation. As the company has almost no value immediately after incorporation, the shares will be very inexpensive.

By default, LLC profits are split according to ownership percentage—if you own 50% of the LLC, you get 50% of the profits.

Often, making an initial contribution entails you transferring some of your personal funds into the LLC's bank account. For future contributions, you can set a schedule for contributions or make them as needed. But whenever you make a contribution, you should keep careful records of what you contributed.

While an LLC doesn't have to deal with a board of directors or hold shareholder meetings, it also can't issue stock. Some investors, such as venture capitalists, can't invest in LLCs because the venture capital fund has tax-exempt partners that can't receive active trade or business income due to their tax status.

What is an equity incentive grant? ›

An equity grant is a non-cash compensation given to someone, giving them a percentage of ownership to a company. This may come in various forms, such as stock options, restricted stocks, or stock appreciation rights.

Private equity funds are closed-end investment vehicles, which means that there is a limited window to raise funds and once this window has expired no further funds can be raised. These funds are generally formed as either a Limited Partnership (“LP”) or Limited Liability Company (“LLC”).

Equity compensation is non-cash pay that is offered to employees. Equity compensation may include options, restricted stock, and performance shares; all of these investment vehicles represent ownership in the firm for a company's employees. At times, equity compensation may accompany a below-market salary.

Most entrepreneurs have the common misconception that giving equity to employees makes them feel like owners and thus treat the business as if it were their own.

Like a private person, an LLC can invest in various assets — stocks, bonds, real estate, cryptocurrency, and other businesses. There are many reasons why people choose to form investment LLCs. For one, it's an excellent way to pool money from several informal investors — friends, family, or business partners.

Since income generated by the LLC is passed through the entity, the members need to individually pay taxes on their share of any income and capital gains generated by the LLC. However, there are plenty of write-offs available that can help decrease your taxes.