<ul><li>LLCs are pass-through entities for tax purposes, which means that profits and losses flow straight to the members/owners.</li><li>Debt-like instruments in an LLC can create “phantom income” for the members/owners if the LLC fails before those convertible notes or SAFEs convert to equity.</li><li>If the LLC fails and the outstanding convertible notes aren’t paid back, the forgiven debt becomes taxable income for the LLC members.</li><li>Founders should avoid issuing convertible notes through their LLCs and educate their financial team on treating SAFEs as contingent equity to avoid unexpected taxable income.</li></ul>

The Pitfalls of Issuing Convertible Instruments Through an LLC: A Founder’s Guide

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