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Use of LLC Profit Interests

Posted in Business Formation

The owners in many new business ventures bring different assets to the table. Often one partner may have significant cash and another has certain skills that are essential for the success of the new venture. In these situations, it is important to consider tax issues when granting the service provider with an owneship interest in the new entity. If the business is organized as an LLC, one option is to grant the service provider a profits interest. Structured appropriately, the service provider will not recognize income on the grant of the profits interest, will share in the future growth of the business, and will be taxed at favorable capital gains rates upon the eventual sale of said interests. For these reasons, profit interests are also useful in retaining or incentivizing key employees to help grow the business.