Equity Compensation Grants in Partnerships and LLCs: Overcoming Tax Challenges and Key Planning Techniques

There are several issues faced by partnerships and LLCs when handling equity compensation matters. These issues are unique to partnership and LLC equity compensation due to the differences in the tax regime applied to entities taxed as partnerships compared to those taxed as corporations. Tax counsel and advisers must have a thorough knowledge of the forms that equity compensation can take and applicable tax rules to avoid any unintended tax consequences.

Partnership and LLC equity compensation can take several forms, including granting profits interests, capital interests, and options to acquire such interests. Each arrangement has specific economic and tax implications, including whether to treat the grantee as an employee or a partner for tax purposes.

Also, tax counsel and advisers face additional challenges, including applying Section 83, significant changes to carried interest taxation, and the treatment of fee waivers. These and other issues present planning and compliance challenges to consider carefully.

Our panel will provide tax counsel and advisers with a detailed analysis of the tax implications of equity compensation grants in partnerships and LLCs. The panel will discuss profit versus capital interests, phantom equity, the application of Section 83, carried interest, and best tax planning methods for compensatory interests and other arrangements.

We will review these and other key issues:

• Capital interest versus profits interest as equity compensation in partnerships and LLCs
• Different planning methods based on the type of equity compensation
• Application of Section 83 and unvested interests 
• Section 409A and compensatory grants of equity interests in partnerships and LLCs
• Tax treatment of carried interest and fee waivers arising from compensatory grants of equity interests
• Best practices and critical considerations for equity compensation grants in partnerships and LLCs

After our presentations, we will engage in a live question and answer session with participants so we can answer your questions about these important issues directly.