The issuance of a partnership profits interest is a tax-efficient tool for a partnership (including an LLC or other entity treated as a partnership for tax purposes) to incentivize its employees or other service providers. If structured properly, the grant of a profits interest should not constitute a taxable event for the recipient. In addition, the recipient of a partnership profits interest may be eligible to benefit from the reduced tax rate for long-term capital gains upon a sale or change of control of the partnership.
GT’s Quick Guide to Partnership Profits Interests summarizes the key requirements to qualify as a partnership profits interest, the benefits of qualifying, and certain other tax consequences to the issuing partnership and the recipient.