Profits Interests and Capital Interests in Partnerships and LLCs: Key Equity Compensation Considerations

Partnerships (including limited liability companies taxed as partnerships) are creatures of contract that offer flexible mechanisms for providing equity-based compensation to employees, managers, and service providers. Two primary forms of partnership interests used for this purpose are capital interests and profits interests. Rev. Proc. 93-27 defines a profits interest as a partnership interest other than a capital interest.  

Both are forms of equity that allow partnerships to incentivize key individuals by aligning their interests with the entity's long-term success.