Structuring Equity Compensation for Partnerships and LLCs: Considerations After Tax Reform

Partnerships and LLCs have several alternatives for providing equity compensation to their employees, including granting restricted equity, profits interests, and phantom (or “synthetic”) equity.

Partnership and LLC equity compensation arrangements present executive compensation counsel with intricate design and structuring challenges, unlike corporate equity compensation, which is relatively straightforward. Our authoritative panel will discuss these challenges by providing a brief overview of the structuring and tax aspects of common corporate equity compensation plans that advisors and their clients may be familiar with, and then discussing in more detail the structuring and tax aspects of comparable equity compensation plans for partnerships and LLCs.

Listen as our panel offers solutions and strategic approaches for structuring equity compensation for partnerships and LLCs and for avoiding common pitfalls. Our panel will also address the effect of recent tax reform on structuring equity compensation plans for partnerships and LLCs.

1. Overview of Basic Equity Compensation Alternatives
2. Full Equity Interests (Capital and Profits)
   1. Review of Corporate Restricted Stock, Restricted Stock Units, and Phantom Stock
   2. Partnership / LLC Restricted Equity
   3. Partnership / LLC Restricted Equity Units
   4. Partnership / LLC Phantom Equity
3. Partial Equity Interests (Profits Only)
   1. Review of Corporate Stock Options and Stock Appreciation Rights
   2. Partnership / LLC Equity Options
   3. Partnership / LLC Equity Appreciation Rights
   4. Partnership / LLC Profits Interests
4. Hybrid Interests
   1. Profits Interest with “Catch Up” Allocations
   2. Gain Sharing Interests
5. Holding Company Arrangements
6. Conclusion

The panel will review these and other key issues:

• How does a capital interest differ from a profit interest?
• Should a Section 83(b) election be made for unvested interests?
• What are the requirements for valuing capital interests and setting the distribution threshold for profits interests, particularly in the case of serial issuances?
• What are the capital account maintenance considerations for alternative forms of partnership / LLC equity grants equity grants?
• What are the differing federal and state income tax compliance aspects of alternative forms of partnership / LLC equity grants?
• Does Section 409A apply to a partnership / LLC equity grant?
• Can a partner or LLC member receiving an equity interest also be an employee of the entity?
• What are the alternatives for handling equity compensation grants when a partnership / LLC is acquired or converts to a C corporation?

Learning Objectives

After completing this course, you will be able to:

• Distinguish the economic and tax differences between capital interests and profits interests
• Recognize the tax consequences associated with different types of partnership and LLC equity interests
• Determine how Section 409A applies to partnership and LLC equity interests and when and whether to file a Section 83(b) election
• Ascertain tools to evaluate the impact of granting a partnership or LLC interest to an employee and possible structuring alternatives relating to dual status issues

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business, legal or public firm experience at mid-level within the organization, providing tax planning and preparing complex tax forms and schedules for partnerships and LLCs; supervisory authority over other preparers/accountants. Knowledge and understanding of partnership and LLC structure, equity compensation in these entities, Section 409A, and 83(b) elections; familiarity with equity compensation alternatives, capital interest, profit interest and equity interest for pass-through entity employees, members and partners.

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