How to structure equity to key employees from tax perspective?

searcher profile

May 08, 2025

by a searcher from University of Pennsylvania - The Wharton School in Bellevue, WA, USA

I’m under LOI for a business (s-corp) and have agreed I will provide equity to a few key employees (who happen to be children of the seller) without capital contribution from them. Their shares are to be same class and have the same rights as mine. How is this commonly structured to minimize the tax impact to them and the company? I can think of the following possible ways: 1.) Company issues shares to them 2.) I gift shares to them 3.) I loan them money to buy the shares and then each year I forgive an amount equal to the annual gift exclusion. Thoughts on the above structures (or others) from a tax perspective? I will speak with an accountant but wanted to seek the opinions of this community. Thank you!
0
8
129
Replies
8
commentor profile
Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
Employee buys shares for $x. He/she owes $x to the company. Company gives them bonus (grossed up to cover their taxes). The bonus is used to pay off the $x they owe the Company over one or more years. The employee gets the pro-rata share of any distribution. The bonus is an expense to the company. If you have debt, then DSCR may be impacted. (Note: I am M&A Advisor. A client wanted to do this. All other professionals for this (tax, legal) provided a solution that the client found too complicated and maintenance intensive. I proposed above. It works. There are problems with employees who are excluded.)
commentor profile
Reply by an member
from New York University in New York, NY, USA
The cleanest and most tax-efficient approach is typically to grant equity through a profits interest or stock options with vesting, but since this is an S-Corp and you want them to have the same class of shares immediately, your options narrow. Of the methods you listed, option 3 is often preferred—loaning them the money and gradually forgiving it under the annual gift tax exclusion avoids immediate taxable income and spreads out any gift tax implications. Direct issuance (option 1) or gifting shares (option 2) could trigger immediate income recognition under IRS Section 83(b) or gift tax liabilities. Be sure to document the loan properly if pursuing option 3.
commentor profile
+6 more replies.
Join the discussion