I recently joined a startup after getting an offer letter that states what my salary will be, mentions the “employee NDA”, and uses the word “employee” a few times. Everything I read made me think it was for an employee role. The offer letter also granted 1% equity stake in the LLC.
After joining, I mentioned that I hadn’t filled out any onboarding paperwork. At that time, I was told I will not be an employee, but an LLC member. That means I need to pay SE taxes on my “guaranteed payments” (ie - not salary). It also means I can’t claim unemployment, etc if the startup fails or I’m laid off. I’m not sure what other implications this has? I guess I’ll need to pay taxes on profits of the LLC (which some companies provide distributions to cover the taxes for those profits, if the profits aren’t distributed) and will be able to write off the LLC’s loses. Maybe the inevitable first few year loses will cover the SE taxes? They are now downplaying the tax implications.
I feel mislead, but I’m not sure if it was a mistake in the wording of the offer letter or if it was framed that way to make it more appealing. I gave up a pretty sweet job with a good career trajectory to join this startup.
I know this isn’t a tax sub, and I have a question out to my accountant to fully understand the tax implications. Any thoughts though? Am I making a bigger deal out of this than it is? Is there any benefit I’m missing to being a member rather than an employee?
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You are certainly being mislead. I would never put someone with 1% of equity on a guaranteed draw. They are trying to avoid all of the obligations and liabilities that come with being an employer.