Equity compensation

[wiredzzz]

What is the name of your state (only U.S. law)? SC

I'm currently working for and one of the earlier employees for a real estate company (LLC) that wholesales/manages REO properties for customers and investors nationwide. The topic of equity interests/compensation has been discussed recently between the CEO and I. As I have never dealt with this kind of situation before, I need some advice on what the most logical and prudent investment move would be. Tax consequences is probably the biggest concern for me as I'm not in a financial position to withstand high tax burdens. I realize in an LLC, the two primary types of equity interests are captial interests and profit interests. Others such as options, purchases and gifts of equity interest exist too. However, when I start comparing one option to another in relation to my situation and the company, I start confusing myself.

For example, the CEO did hint at the idea of setting up an LLC for a recipient where one could acquire REOs but didn't go into the details such as if this would be a grant or purchase. For the sake of the example, lets say you are required to put up front capital for the properties. Would this route be more financially beneficial as opposed to capital or profit interests? Is this more of a short term route?

If I foresee this company in terms of valuation increasing greatly in the near future, what would be the most beneficial compensation route with low tax consequences? If anyone could provide some guidance, even if it's just general, in layman's terms, I would greatly appreciate it.

 

[tranquility]

One cannot be in a situation where you cannot withstand a high tax burden. Cannot. Think about it for a bit and see why.

As to the rest, if you are buying and selling properties as a business, you will probably pay at ordinary income and not capital gains rates.

 

[wiredzzz]

One cannot be in a situation where you cannot withstand a high tax burden. Cannot. Think about it for a bit and see why.

Yes, I realize they are directly proportional. I guess I worded that poorly and could see how one would be mistaken.
To rephrase my statement and some of my questions, I guess I'm more concerned with up front consequences. Am I going to be taxed at time of grant, vesting, etc? Is this also going to depend on the type of compensation?

As to the rest, if you are buying and selling properties as a business, you will probably pay at ordinary income and not capital gains rates.

I may be mistaken but I thought when you sell capital asset, such as a stocks and properties, that would be taxed as capital gains? And would it be a good idea to file an LLC in places like Nevada or Wyoming?

 

[tranquility]

I take my comment back, in a pass through entity you don't control distributions from, you can have a too high tax burden. In general, you pay taxes for years you make income.

A capital asset is one held for investment. If your business is buying and selling properties, at some point it will be ordinary income and not capital gains.