Equity or alternative compensation in an LLC?

Question

I am currently working for a real estate startup (LLC) that wholesales REOs nationwide. I was one of the earlier employees to get hired. Since my time of employment, the company has been expanding rapidly and the future looks pretty bright. Not too long ago, the topic of equity distribution/ alternative compensation methods has been discussed between the CEO and I. I have done some reading on the topic but still have a lot of unanswered questions. He had mentioned that given the nature of the business, a 1099 form would only apply here. As far as I'm aware, most of the company's assets are allocated into various LLC entities for managing investor portfolios and for it's own if that makes any difference. I take the recipient would have to setup a separate account as an individual contractor where the misc income or % of real estate sales proceeds can be received.

1) Specifically, would the 1099-MISC form be used in this case?

2) What are some general methods going about determining the appropriate % of distribution?

3) If this is the only logical method of compensation (receiving a % of real estate sales), how would it be taxed?

4) Are there any major advantages/disadvantages to acquiring and selling properties through the company as opposed to receiving a % of sales?

If additional details or clarification is required, please let me know.

Answer 1

I'm not sure 1099-MISC is what you should expect. Equity means ownership, and in LLC context it means membership. As an LLC member, you'll get distributions and should receive a K-1 form for tax treatment, not 1099 or W2.

If the CEO is talking about 1099 it means he's going to hire you as a contractor which contradicts the statement about equity allocation. That's an entirely different situation.

1) Specifically, would the 1099-MISC form be used in this case?

1099-MISC is used to describe various payments. Depending on which box is filled, the tax treatment may be as of employment income (subject to SE taxes) or passive income (royalties, rents, etc - subject to various limitations in the tax code).

3) If this is the only logical method of compensation (receiving a % of real estate sales), how would it be taxed?

That would probably be a commission and taxed as employment income.

I suggest to get a professional tax adviser consultation on this issue, with specific details, numbers, and kinds of deals involved. You can get gain or lose a lot of money just because you're characterized as a contractor and not LLC member or employee (each has its own benefits and disadvantages, and you have to consider them all).

4) Are there any advantages/disadvantages to acquiring and selling properties through the company as opposed to receiving a % of sales?

Yes. There are advantages and there are disadvantages. For example, if you're using a corporation, you can get salary, if you're a contractor you cannot. There are a lot of issues hidden in this distinction (which I've just discussed with KeithS in this argument).