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Abstract: 

LLCs and other entities taxed as partnerships have a number of equity compensation options available to incentivize their service providers. Most, if not all, of these options have been available for many years, and business people generally know them fairly well. After all of the economic turbulence of the last few years, however, many business people are less certain about which options best suit their tax and business goals. Further, after a near global economic collapse and an extended but—at least for now—unsuccessful congressional attempt to eliminate most carried interest tax benefits, many banks, hedge funds, REITs, RICs, and other taxpayers are wondering where things stand with partnership and LLC equity compensation for service providers. This article explores the tax and business advantages and disadvantages of each equity compensation option available to LLCs and then describes the circumstances under which each option is likely to provide LLCs and their service providers with the best overall tax and business results. These issues are of critical importance to taxpayers in the financial services industry, who have historically been among the leaders in innovative equity compensation techniques and who, to remain competitive, must remain on the cutting edge of equity compensation planning.

Keywords: profits interests, carried interests, capital interests, options, unit appreciation rights, phantom interests, executive compensation

Affiliations:  1: Venable LLP; 2: Venable LLP.