Employee Ownership in LLCs

Limited liability companies are a popular form of corporate organization for smaller companies. They are taxed in much the same way S corporations are taxed, but, unlike S corporations, they do not have to distribute earnings pro-rata to owners. If you search the Web for employee ownership in LLCs, you'll find almost every article suggesting that it is best to convert to S or C status to make it more practical. In fact, however, LLCs can have forms of broad-based equity sharing. Capital interests work similarly to restricted stock and profits interests similarly to stock options. More common, however, would be an LLC unit that would function in much the same way as phantom stock or stock appreciation rights and be paid out in cash. The "interests" approaches raise some tax uncertainties that, while subject to common practice, are still mostly governed by proposed regulations that were never finalized. The NCEO has an article on this topic as well as other resources.