The liquidation threshold is similar to the strike price of an option, although they are subject to different taxation and can be structured for long term capital gains.Â

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A multi-member LLC is a company with two or more owners (or members). Unless the members file taxes as an S-corp or C-corp, multiple-member LLCs get taxed like partnerships, which means each member pays a portion of the business’ taxes on their personal income tax return. However, unlike a partnership, the members of an LLC aren’t personally liable for unpaid business debts. Â

Other states, including California, do not allow the in-state formation of Series LLCs but allow those formed in other states to do business there.Â

Structuring your business as an LLC can be a smart move—LLCs offer liability protections for owners, flexible tax rules, and potential incentives for employees.Â

Personal liability protection: An LLC offers business owners limited-liability protection for business debts. That means creditors can’t go after your personal assets—like your home or car—if your business defaults on a loan, faces a lawsuit, or goes bankrupt.

A Series LLC is a business entity where you can separate business assets, debts, and more into independent units and assign different members or managers to each unit. Each unit is only liable for and taxed on the specific assets or debts it owns.

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On the other hand, an LLC’s separation of personal assets and business assets is like a corporation, but unlike a partnership.

Cap table management — issue and manage complex securities across multiple entities, track historical ownership structures, and increase transparency for members.Â

Flexible management structure and profit sharing: Members of an LLC can either oversee the company, manage operations, and make decisions themselves, or hire outside parties to take on those roles. LLC members also have flexibility when divvying up the company’s profits and  compensating employees with equity.Â

Choose a name. Your business name will need to be available (not registered by another business in the state) and have “LLC” or a similar phrase at the end of it.

Easy to form: Every state has different requirements and fees, but in general, the process for LLC formation is fairly straightforward and doesn’t require a lot of paperwork.

Dividends and distributions management — calculate, record, and share distributions on current profits, tax, dividends or preferred returns.

Get a step-by-step guide to choosing the right equity plan for your company, so you can attract talent, retain employees and ensure they are invested in the company’s success.

A multiple-member LLC can be a good option if you own a small to medium-size business, have multiple owners, and want to share profits among them.Â

Some LLCs enable employees the right to buy equity later on, at the fair market value at the time of the agreement, in a setup that is similar to a corporate stock option grant.Â

Working through the legal and operational issues involved in forming and managing an LLC can be complex. Making use of automated services such as Carta reduces operational burden and allows you to focus on growing your company.Â

In a typical corporation, employees can be awarded equity in the form of stock options, or the right to buy common shares of the company at a given price. LLCs have a different model for employee equity.Â

There are a few different types of LLCs, including single-member LLCs, multiple-member LLCs, and Series LLCs. The one that’s right for you will depend on your industry, finances, and business goals. Â

Employees in LLCs can be awarded profits interest units (PIU). PIUs don’t represent ownership of common stock like stock options do. Instead they entitle the holder to a portion of the value an LLC gains over time, based on the liquidation threshold, or value of the company at the time an employee receives a profits interest.

Provide information about your business. This includes a description of the business and names and contact information for your LLC’s members and its registered agent – the person who is designated to receive official paperwork on behalf of the business.

A Series LLC can be a good option for venture capitalists, private equity professionals, real estate companies, holding companies, or entrepreneurs who want to run several different LLCs as one company. However, they’re only allowed in certain states: Alabama, Arkansas, Delaware, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nevada, North Dakota, Oklahoma, Puerto Rico, Tennessee, Texas, Utah, Virginia, Washington, D.C., and Wyoming.

LLCs are generally easier to form than corporations. While states have different procedures, there are some general steps you will need to take.

As LLCs are not capped to the number of members they can have, many LLC owners choose to raise capital through limited partners with small direct investments. Membership units (sometimes called capital interests) represent equity similar to a common share of a C-corporation.Â

Carta can help any company manage its ownership structure, including LLCs, whether they are single member, multiple member, or Series LLCs. That includes:

A limited liability company (LLC) is a business structure that legally separates personal assets from business assets. This structure protects owners from being pursued personally for repayment of debt or liability associated with their businesses.Â

A single-member LLC is an LLC with one owner, similar to a sole proprietorship. For tax purposes, the IRS considers single-member LLCs “disregarded entities.” This means the owner pays self-employment taxes like a sole proprietor and reports all business activity on their personal federal income tax return.Â

Each LLC has an operating agreement that outlines the rules and requirements around its finances, equity structure, distribution rules and general governance. There are no limits on the number of members a LLC can have. Some businesses, such as banks and insurance companies, generally cannot be LLCs.Â

However, there are many factors that affect how much an employee will be taxed for profits interests, so it’s crucial to consult an accountant and lawyer to go over your options.

For example, like partnerships but unlike corporations, LLCs may choose to not be taxed directly — instead the individual members of an LLC can report profits and losses on their personal tax returns (this is known as a “pass-through” because profits and losses are passed through to members). The advantage of this tax arrangement is that members of an LLC are taxed once, unlike shareholders of a corporation, who may pay taxes at the corporate level and again as individuals once they receive profits.Â

Can be difficult to raise money from venture capital investors: LLCs may be limited in the amount of money they can raise from outside investors such as venture capitalists. Most investors prefer to put their money into C-corporations, which generally have more options for liquidity and more straightforward tax reporting. → Learn more about LLC funding.

If an LLC employee makes an 83(b) tax election, they will likely experience similar tax advantages to those afforded by incentive stock options (ISO), meaning the employee won’t have to pay taxes when they get the grant.Â

File articles of organization. This can be filed online with a secretary of state or similar agency. Some states have different names for this, such as “certificate of formation.”

A single-member LLC can be a good option if you’re a small operation with few or no employees and you want to retain sole ownership of your company.Â

Flexible tax reporting: You can choose how you want to be taxed. The most common option is the pass-through method, where business profits go directly to LLC members without being taxed at the corporation level. However, you can also make a C-corp or S-corp election, which means you’ll be taxed as a corporation but may get certain advantages when filing.

But there are lots of factors to consider when deciding how to structure your business. If you’re considering forming an LLC, keep reading to learn more about the types of LLCs, pros and cons, equity incentives, and how they work.

Audit-ready valuations — receive fast and compliant 409A, liquidation threshold, or profits interest valuations and use them to issue equity interests.

Self-employment taxes: The IRS looks at LLCs like partnerships or sole proprietorships in terms of taxes. If you choose the pass-through method, you’re technically considered self-employed, which means you have to pay Social Security and Medicare taxes based on your business’s net earnings.

Some LLC owners conclude that it’s too expensive to manage the tax preparation for capital and profits interest holders. As an alternative, many LLCs choose to offer phantom equity grants to employees and advisors. These grants act as cash bonuses which vest over time and typically pay out when the company is sold.Â

Incorporation costs and annual fees: Depending on the state you file in, you may have to pay anywhere from $50 to $500 to form an LLC. Plus, you have to pay annual filing fees to keep your business current. The fees vary by state, so make sure to check your state’s Secretary of State website. Â

Neither Carta nor any of its affiliates will be liable for any damages, including without limitation direct, indirect, special, punitive or consequential damages, caused in any way or arising from the use of the services or reliance upon the information provided in this communication or in connection with any failure of performance, error, omission, interruption, defect, delay in operation or transmission, computer virus or line or system failure. Carta offers certain brokerage services through its wholly owned broker-dealer subsidiary Carta Capital Markets, LLC (Member: FINRA/SIPC). Contact: eShares, Inc. DBA Carta, Inc., 333 Bush Street, Floor 23, Ste. 2300, San Francisco, CA 94104.

Secure data rooms — keep all equity and tax documents, including operating agreements, amendments, and form K-1s, organized in data rooms and easily share them with members.