Profits interest
An interest in future LLC profits without entitlement to current capital. Common as employee equity grant.
Definition
Profits interest is a type of LLC equity that gives the holder a right to share in future profits and appreciation but not in the current value of LLC capital. Profits interests are commonly granted to employees as equity compensation. Under IRS Revenue Procedure 93-27 and 2001-43, properly structured profits interests are not taxable upon grant.
Context
Profits interests are LLC-equivalent to stock options in C-Corps. Vesting schedules typically apply.
Example
A SaaS LLC grants a key engineer a 5% profits interest with 4-year vesting. The engineer receives no current value but participates in future profit allocation and any sale-of-LLC proceeds above the grant-date value.
Common pitfalls
- Profits-interest grants must follow IRS Rev. Proc. requirements to avoid current taxation.
- Operating Agreement drafting is critical; engage a Delaware corporate lawyer for any profits-interest grant.