Businesses often, at least initially during the start-up business phase, don’t have the revenue to hire employees or a work force. Once businesses take off, however, and begin to grow, business owners will start to need help, but often do not want to, or cannot afford to hire traditional employees to work for their business. Our Chicago business lawyers can propose a myriad of legal solutions to this employment maintenance problem.
In these situations, business owners should consider hiring independent contractors, consultants, commissioned sales representatives or even offering profit interest or equity incentives to key employees in exchange for their valuable services. These are often great solutions for certain businesses with limited budgets, and that are not yet stable enough to hire a full-time work force, but still need help in order to maintain business growth.
Employee of Partnerships and Limited Liability Company
Where a business is organized as a partnership or limited liability company the most common method of granting a service provider an equity interest in the Company is to grant the service provider a “profits interest” in the Company without the transfer of an accompanying capital interest or any immediate tax consequences. The advantage to the service provider or key employee is that he or she will only realize income at the time monies are received (in a liquidation or change in control event).
Employee of C Corporation or S Corporation
If the business is owned by a corporation, the service provider can be paid for his or her services by the corporation with its own stock. Where property, in the case of stock in the Company is received in connection with the performance of services, the service provider or key employee is deemed to receive income equal to the difference between the amount paid (if any) for the stock received and the fair market value of the stock at the time it is granted. If the stock is subject to a substantial risk of forfeiture at the time it is granted, the service provider does not have to recognize the income attributable to the stock grant until such time as the risks of forfeiture lapse (or the stock is sold). If the Company is organized as a Subchapter S corporation, care must be taken on the grant of any equity interests.