Rockville, MD asked in Tax Law and Business Law for Maryland

Q: Schedule K-1 Taxes on Conversion from LLC to C-Corp on unvested shares?

I was a partner with an LLC startup & it converted to a C-Corp in Jan 2019. At that point, I had been vested 33% of my LLC units/C-Corp Shares. In Apr 2019, my total number of shares (vested + unvested) were reduced from 125k to 48k. In Jul 2019, I vested another 33% of the new amount (half of the difference of the remaining unvested shares). Finally, when I left the company in Oct 2019, I was prorated my final vesting shares. To date, I still retain 45k vested shares.

I received a K-1 on the conversion of the LLC units to C-Corp shares on my *unvested* holdings. Through the series of events as mentioned earlier where I only own a vested portion of the original number of shares, is it appropriate that I am taxed on the original number of total shares? Or, should I only be taxed on the number of shares I actually own? I'm not sure I understand why I'm being taxed on the entirety of the shares namely the unvested portion, if by the end of the year, I only own a portion of it.

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1 Lawyer Answer
D. Mathew Blackburn
D. Mathew Blackburn
  • Tax Law Lawyer
  • Englewood, CO

A: There are several different types of restricted equity that can be provided to an employee. Each is taxed in a different way. To review your particular situation is going to require the documents for the equity grant and the conversation documents to be reviewed.

Without a thorough understanding of the documents that create the equity transfer and determine the vesting process it is not possible to provide an answer.

I would suggest you retain counsel to discuss this matter.

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