I do not have an Operating Agreement yet. I created the LLC myself with the basic requirements: articles of organization and some other basic forms (I cannot remember the exact name right now). Is an operating agreement a must at early stages?
It seems that giving equity would be easier as a C-Corp than LLC? I set-up an LLC for my company initially for liability protection, tax benefits for all the company expenses. Is it complicated to transfer from LLC to C-Corp?
My main challenge right now is the COST. CPA cost money. Lawyers cost money. I am sure a lot of people on this forum are in my situation. Any suggestion to avoid/minimize these costs when it comes to hire employees and creating employees incentive?
Suggest you go to SmallBizIncorporator.com where you will find an order form for a 46 page Operating Agreement tailored to your state. Price is $25.00. Comes on CD. This site is part of SmallBiz.com. You can modify to fit exactly what you need based upon your current situation. See the article on SmallBiz entitled:
Why change from an LLC? You can control it with the operating agreement and specify exactly how you want to manage all types of situations. You may need to file a state form amending your Articles of Organization depending on what your original Articles of Organization declared your management form to be. Again, this depends on your state rules.
Do not set this up without running it past an attorney aware of your state LLC rules and also how you have organized. Gina and PepperLegal are correct. The cost of an attorney may seem high (outrageous?) right now due to your financial situation; however, if you do it wrong the costs down the line will by far outweigh any reasonable cost now. Check with your attorney -- perhaps he or she will be agreeable to a payment plan. If not, ask if any other suggestions come to mind.
I also suggest that you think out the ramifications of hiring employees in your current financial situation. If you can afford them, you can afford an attorney and CPA.
As far as creating incentives for potential employees, think about what you are receiving first as a payment for these incentives. Be specific in what you expect. Complete a job description that outlines exactly what the job entails. Also, set up a contract specifying exactly what you must receive in effort prior to the grant of the incentive. What is the timeframe? How many units of ownership are you willing to give for this service? Will they have a say in how the company is run? How about money distributions for tax purposes? Between the Operating Agreement and clear job descriptions and the agreement between you and your key employee you will be able to minimize costs. This is what attorneys and CPA`s can help with. Borrow the money from someone if you need to!
Check out www.myLLCagreement.com. It`s the only site will allow you to customize your LLC operating agreement so that you can provide an employee with an equity interest in the LLC for the performance of services (a "profits interest`). The program will even allow you to decide whether you would like the profits interest to vest upon grant or vest over a period of time (vesting restrictions). In addition, the program has been designed to comply with all the current IRS Revenue Procedures on the taxation of profits interests to ensure that the grant of the profits interest is tax free to the recipient. The program even generates a Restricted Grant Agreement that outlines the terms of the profits interest grant and a Section 83(b) Election Form, which should be filed with the IRS if you are granting the interest subject to vesting restrictions. Note, once you provide an equity interest to your employee, your employee will be recognized as a member of the LLC and, thus, when the profits interest recipient becomes recognized as a member for federal income tax purposes, his/her relationship to the LLC changes. The LLC should no longer provide a Form W-2 to the profits interest recipient. Instead, the profits interest recipient should receive a Schedule K-1 from the LLC that reflects his or her distributive share of the LLC`s items of income, gain, loss, deduction, or credit for the taxable year and amounts transferred as distributions. Instead of paying FICA taxes on amounts received as wages from the LLC, the profits interest recipient`s distributive share of LLC items may be subject to self-employment tax under Internal Revenue Code Section 1401. Certain fringe benefits may be taxable to the profits interest recipient as a member, including group term life insurance under Internal Revenue Code Section 79 and payments received under accident or health plans under Internal Revenue Code Section 105.
The program is easy to use and generates law firm quality LLC operating agreements in minutes. The best part of it is that the program is free until mid may 2009.
Best of luck!