You are correct; members of an LLC are considered self-employed, and since the entity is disregarded at the federal level for tax purposes, it's not really pos

You are correct; members of an LLC are considered self-employed, and since the entity is disregarded at the federal level for tax purposes, it's not really possible to pay them[selves] W-2 wages. You don't issue equity to employees in an LLC; you can issue shares of some sort of bonus pool like Jason describes, or you can make them members, but in that case, they have to pay SEP taxes and cannot be considered W-2 employees. Generally speaking, LLCs are not appropriate entities for a highly fluid, ever-changing shareholder picture. If you want to be able to easily add or drop employees--and for that matter, institutional investors--as partners, don't choose a pass-through entity. Choose something that is structured as an appropriate vehicle for that kind of thing, i.e. a C-corp with a share pool. There are ways to get around this, of course. The simplest idea I can think of if you are an LLC is to create a separate C-corp as a holding company, and have it own some (presumably non-trivial) percentage of the LLC. You can then issue shares in the Inc. holding company to your senior employees. The Inc. would of course be entitled to the highest liquidation preference, be dilution-proof to whatever extent desired, etc. Edit: You can also do what grellas said above and make some sort of accommodation for an equity pool in an operating agreement. But if you want to actually write any employees in as partners, you'll have to amend your articles of organisation every time you do it. So, it's still by far not the most flexible entity type for that.