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TALK TO A CPA. Not just any CPA, but a really good one. Depending on your location I'm happy to recommend one. The issue with equity, no matter the structure,
by enjo 16y ago
TALK TO A CPA. Not just any CPA, but a really good one. Depending on your location I'm happy to recommend one.
The issue with equity, no matter the structure, is that it comes with a pretty difficult tax burden. That equity counts as taxable income. Be prepared for that... If this guy is forming a new entity to cover this, there is still going to be some level of initial valuation. You'll be taxed on 10% of that. If there is some sort of vesting schedule in place, it gets even more complex (in that situation you need to fill out a form electing to be taxed on the whole amount today, rather than as it vests).
The point being: You need to be concerned with more than just the structure of the entity, but how this will effect your personal income situation as well.
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As for the rest, there is already some good advice here. If you go the LLC route, then you need to specifically talk to a lawyer to ensure that you are protected when the operating agreement is drawn up. With a LLC there is very little implicit protection for you, everything has to be specifically spelled out in the partnership agreement.
A C-Corp would give you more options, for things like preferred stock.
The suggestion about taking this is a revenue share is probably sage advice. If you're goal is to generate passive income, then equity is not the answer. Equity has no intrinsic value until you actually sell the business (and depending on the structure it may not have value then). I've seen partnership agreements that give x% to a partner, but provide a minimum floor for another. Meaning that when the company sold the first partner took $10M right off the top, and then the other partner only got 10% of the rest.
In other words, if you go the equity route you really need a lawyer and a CPA to help you sort through all of the implications. This is not simple stuff.