One Benefit Of LLCs–Profits Interests | Startup Law Blog
LLCs taxed as partnerships as a choice of entity have their drawbacks, which we have discussed elsewhere. However, LLCs do have one advantage over corporations when it comes to granting equity interests to service providers--they can grant what is know as profits interests to their partners. See IRS Rev. Proc. 93-27 and 2001-43. A profits interest is an interest in an entity taxed as a partnership that entitles the holder to a share of profits in the entity going forward (and no share of the liquidation proceeds if the entity were liquidated immediately after receiving the interest). The receipt of profits interest is not taxable to the recipient. This is different from and a more advantageous treatment than the receipt of stock of a corporation by a service provider. When a service provider to a corporation receives stock, the service provider will have an immediate tax impact if the stock is fully vested or if the service provider makes a Section 83(b) election. If the stock is