In order to attract and retain qualified talents, technology companies often will use equity based compensation. This method of compensation is beneficial for technology companies for several reasons:
1. There is no out-of-pocket cash cost.
2. It aligns the goal of growth between the employees and the company.
3. The vesting schedule allows companies to retain talent and minimize turnover.
4. Years of this practice have made it the norm for many technology companies.
The exact mechanics of equity based compensation depend largely on how the company is legally structured and how the company is taxed. While both corporations and LLCs can use equity compensation, the arrangements are very different for each, particularly in regards to the taxation.
Corporations & LLCs Taxed as Corporations
With an LLC taxed as a corporation, there is no difference in the taxable effect on the business as if it were organized as it as a traditional corporation. Corporations generally have three different methods of compensating employees.
Incentive (Qualified) Stock Options (ISO): ISOs for established and publicly-traded companies are typically offered to executive-level employees and have significant restrictions on their exercise and grant.