What Are Restricted Stock Units and How Can They Be Used as Incentive Compensation by LLCs Taxed as Corporations?

Greetings and salutations, dear readers! Here we are, in the eighth part of our insightful series. It’s a joy to see your consistent support, demonstrating your dedication to enhancing your business acumen. Kudos to your perseverance! Now, let’s dive right into today’s captivating topic - Restricted Stock Units, fondly known as RSUs. As a business leader, understanding RSUs can be a game changer for your organization’s incentive compensation structure. With RSUs in your arsenal, you could not only fuel your employees’ motivation but also align their goals with your company’s growth trajectory. As the saying goes, a well-informed manager makes well-informed decisions. So, let’s venture forth, unravel the complexities of RSUs, and harness their potential for your business’s prosperity. Stay tuned!

Understanding Restricted Stock Units

Alright, let’s delve into the nuts and bolts of Restricted Stock Units (RSUs). Imagine RSUs as IOUs issued by the company, symbolizing a pledge to give team members shares at a later date. They are like a promise of a gift that’ll be delivered in the future. That’s right! On the vesting date, the company becomes legally bound to convert those RSUs into real shares on the settlement date. Interesting, isn’t it?

But here comes the critical part - taxes. Just like with any financial instrument, understanding the taxation aspect of RSUs is crucial. At the grant stage, all is clear, no taxes to worry about. However, at vesting, things start to get interesting because FICA tax is owed on the fair market value of the RSU. Upon settlement, the fair market value of the shares becomes taxable ordinary income for the recipient and a tax deduction for the company. If the shares are sold later, any gains beyond the value at settlement will be treated as capital gains.Remember, make the most of RSUs by staying informed about these tax implications!

Advantages of RSUs:

  1. Value Retention: Unlike some forms of equity, RSUs retain some value even if the company’s stock price declines. They’re like a safety net, ensuring you won’t walk away empty-handed.
  2. Cost-Free Award: With RSUs, the holder isn’t required to pay for the award. Unlike options, there is no exercise price.
  3. Settlement Deferral: Some companies offer the ability to defer settlement of RSUs, adding an extra layer of flexibility. However, this is subject to Section 409A’s requirements.

In summary, RSUs offer a great blend of value, affordability, and flexibility, making them an attractive proposition for any incentive compensation package.

Moving on to the flip side, no financial instrument is without its potential drawbacks.

Disadvantages of RSUs:

  1. No Beneficial Ownership: Holders of RSUs are not beneficial owners until vesting, meaning no voting or dividend rights until then. Patience is indeed a virtue with RSUs.
  2. Section 409A Compliance: RSUs must be structured to comply with, or be exempt from, Section 409A, which can complicate things a bit.
  3. Potentially Less Incentivizing: Time-vesting RSUs might not motivate employees as much as Performance Share Units (PSUs), which link rewards to the company’s performance.
  4. Dilution. The settlement of RSU grants dilutes the ownership percentages of other stockholders.

In a nutshell, while RSUs do offer compelling advantages, they also come with a few potential pitfalls that need to be carefully considered in your compensation strategy. Despite the challenges, a well-structured RSU program can serve as a potent tool to incentivize and retain key talent.


We hope this article has been informative and useful for your business. If you have any questions or comments, please contact us at info@wilkinsonlawllc.com. We plan to answer general questions in an upcoming FAQ series. If you need legal advice specific to your situation, please ask to schedule a consultation with an attorney to discuss your company’s goals.

Join us again tomorrow as we continue to unravel the world of incentive compensation! We’ll be diving deep into incentive stock options, exploring their structure, benefits, and how they can powerfully benefit your corporation. Don’t miss out on this chance to give your business the competitive edge it deserves!

This article is for informational purposes only and should not be relied upon as tax or legal advice. Please consult professionals for advice tailored to your specific situation. The author and publisher assume no responsibility for any errors or omissions or for any actions taken based on the information presented.