Explaining Profits Interests and Their Tax Consequences

By: Joseph E. Hunt

JEH Headshot Photo 2017 (M1147148xB1386)

Equity incentives are an important form of compensation in many types of businesses and are especially important at the start-up phase when only limited funds may be available to pay cash compensation. Entrepreneurs familiar with the corporate form of business likely have received equity incentives themselves, possibly in the form of restricted stock, stock options or stock appreciation rights (SARs). Now that limited liability companies (LLCs) have become a popular choice of entity, more service providers are receiving LLC equity incentives. One such LLC equity incentive is a “profits interest,” which is unique to tax partnerships and carries some tax advantages over other forms of equity incentives. For a breakdown of the tax consequences of profits interest to both the recipient and grantor, please see our full article.