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I have a pretty standard arrangement with an LLC I'm employed by. I have unvested units and a vesting schedule for when they become "vested" units. I used vested in quotes because the LLC's Operating Agreement holds that the units are forfeited, even after vesting, 24 months after I leave the LLC.

As I understand it, that's not actually vesting.

These units can be exchanged into "full" units, which are permanent, but only by a vote by the board, not by time, performance, or any other factor I can control.

What kind of units do I actually have? What are the tax implications (compared to vested) of this type of unit?

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    So if they can only be exchanged if the board allows it, you have something that is potentially worthless?
    – Hart CO
    Aug 22, 2019 at 21:03
  • @HartCo Correct. I do have a right to profits and voting, but that can be taken at any time.
    – Michael W.
    Aug 22, 2019 at 21:11
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    What are they called in your agreement? Look out for terms such as “option” and “class”.
    – Lawrence
    Aug 23, 2019 at 4:34
  • @Lawrence They are simply called "vested units," but I believe the name is incorrect, since they aren't technically vesting. This may be a drafting error on the part of whomever wrote the Operating Agreement.
    – Michael W.
    Aug 23, 2019 at 5:17
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    Can you do anything with a vested unit other than wait for board action? If not, you don't really have anything, other than the right to request a specific number of shares from the board. As such, there shouldn't be any tax implications, because you haven't received anything of value.
    – chepner
    Aug 23, 2019 at 15:28

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Tax wise, you simply report the income from your units like any other shareholder or LLC member it's just at some point the income will go away. And go away it will, unless you demand your units be made permanent while you remain with the LLC. Once your employment ends the LLC has no reason to make your units permanent.

I wouldn't get hung up about the definition of "vesting"; it has little legally defined meaning. You have units you control until 24 months after leaving employment. That's really all that matters.

Unless your income from the LLC units is very high I would likely run from this. It sounds like a bum deal to convince suckers into thinking they get something when there's nothing.

If you stay in this employment you should seek an attorney. This smells fishy.

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