How Does the Termination of Team Members Affect Incentive Compensation by LLCs Taxed as Corporations?

As we pivot towards the 17th milestone in our informative series, we wish to extend our heartfelt gratitude for your continued engagement. Over the past editions, we have been threading together an intricate tapestry, providing a comprehensive guide for business owners and managers, and here, we continue that mission. In this particular piece, we cast our focus on the interplay between team member termination and incentive compensation within the context of LLCs taxed as corporations. Through our discussion, we aim to unpack the complexities and provide clear insights that will empower you to make informed decisions when managing such circumstances.

Decoding the Impact of Different Termination Types on Incentive Compensation

The course of incentive compensation can significantly shift upon a team member’s termination. The specific nature of the termination - be it for cause or not - is the fulcrum that tips the balance. This plays a vital role in shaping the future of these rewards. Acknowledging and understanding this interplay is a critical facet of enlightened business management.

Navigating Termination Scenarios

When it comes to incentive compensation in LLCs taxed as corporations, termination marks a pivotal point. Initiated by either the company or the team member, each scenario unfolds with unique financial implications. Let's break these down to arm business leaders like you with the knowledge you need to navigate such situations.

Company-Initiated Termination: Implications on Incentive Compensation

If the company leads the termination, the impact on a team member’s incentive compensation, such as stock options, restricted stock, or performance awards, can vary. If the termination is for cause, usually due to misconduct or non-performance, unvested awards are forfeited and, in most cases, the vested incentive awards are also lost or redeemed at the original cost.

However, if the termination is not for cause, the approach changes. The company could redeem the vested awards at their current Fair Market Value (FMV) or allow the team member to retain them. An additional factor to consider here is the possible acceleration of unvested rights, which can bring unearned awards into the team member's immediate ownership.

Team Member-Initiated Termination: Impact on Incentive Compensation

When the team member decides to part ways, their reason for leaving shapes the fate of their incentive compensation. If they leave for a good reason, such as relocation, the treatment of their awards aligns with a company-led non-cause termination. Usually, they either keep their vested awards or have them redeemed at FMV. Typically, unvested awards are lost. Although, in some cases, a shrewd team member may have been able to negotiate a services agreement where their unvested awards are accelerated.

In contrast, if a team member leaves without a good reason, the implications echo those of a company-initiated termination for cause. Here, unvested incentive awards are lost, and the team member typically forfeits the vested incentive awards or transfers them back to the company for the original cost.

With a clear understanding of these scenarios, you can better handle the complex landscape of incentive compensation during termination. This knowledge equips you to make well-informed decisions, ensuring beneficial outcomes for both your company and its team members.


We hope this article has been informative and useful for your business. If you have any questions or comments, please contact us at 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.

In our upcoming discussion, we’ll illuminate the intricacies of securities law and how they intersect with the fascinating world of incentive compensation. Stay tuned!

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.