Statutory merge from llc to c corp. Converting previously granted equity into vesting equity

[EvanL2259]

Jurisdiction

Idaho

Hi all,

I am currently building a product with two co-founders and operating as an LLC. We have a basic founders agreement between us that granted equity without a vesting schedule.

We have all agreed to convert/merge the LLC into a new C corp and that any granted equity will be changed into vesting equity once the conversion is complete. If a co-founder resigns or is removed at a later point, do they have any legal argument for equity previously granted at the LLC?

 

[adjusterjack]

If a co-founder resigns or is removed at a later point, do they have any legal argument for equity previously granted at the LLC?

That depends on the LLC's operating agreement. If you omitted that, I suggest it's time you get an attorney to assist you in setting up the corporation so you don't make the same mistake again.

 

[Tax Counsel]

Hi all,

I am currently building a product with two co-founders and operating as an LLC. We have a basic founders agreement between us that granted equity without a vesting schedule.

We have all agreed to convert/merge the LLC into a new C corp and that any granted equity will be changed into vesting equity once the conversion is complete. If a co-founder resigns or is removed at a later point, do they have any legal argument for equity previously granted at the LLC?

There are a lot of details missing from your post. So I'd encourage you to see corporate counsel to review your plans and make recommendations on how best to achieve your goals. However, if I assume that the LLC terminates in the conversion then the co-founders have no equity in the LLC to claim — the LLC is gone. I'm curious as to why you went with a C corporation rather than a S corporation. Are one or more of the shareholders ineligible to be S corporation shareholders (e.g. a non resident alient, etc)? In most cases, if the business can qualify for a S corporation election that is usually the better choice. Note that with a C-corporation, the profits are subject to income tax twice: the C corporation pays tax on the profits it makes, and then when the profits are distributed as dividends, the shareholder is taxed on the income too. With a partnership or LLC only the owners are taxed on their share of the income; the partnership/S corporation itself does not pay any income tax.