What is rollover equity, and why do private equity buyers frequently require it? In many business sales, sellers do not receive 100% cash at closing. Instead, they retain an ownership interest in the acquiring business through a structure commonly known as rollover equity. Properly structured rollover equity can defer taxes, align incentives between buyers and sellers, and allow founders to participate in future growth. However, the tax treatment varies significantly depending on how the rollover is structured.

Can a business transaction be undone for tax purposes after it has already closed? In limited circumstances, the answer may be yes. Under a common-law principle known as the rescission doctrine, federal tax law may permit certain transactions to be treated as though they never occurred. If the parties act quickly and satisfy specific requirements, a rescission can effectively provide a tax 'do-over' without creating additional taxable consequences.

What happens when an employee or executive is promised equity, but the company’s value increases significantly before the equity award is actually granted? This is a common problem for startups, family offices, real estate ventures, and other LLCs taxed as partnerships. A traditional profits interest generally participates only in appreciation occurring after the grant date, which can produce results that differ significantly from the parties’ original expectations. Fortunately, a properly structured catch-up distribution right may help bridge that gap while preserving the favorable tax treatment associated with profits interests.

Can an LLC grant equity to employees or executives without triggering immediate taxable income? In many cases, the answer is yes. For businesses taxed as partnerships, a properly structured profits interest may allow service providers to participate in future growth while avoiding immediate taxation upon grant.

Profits interests have become one of the most popular equity compensation tools used by startup founders, family offices, real estate sponsors, private investment funds, and other partnership-taxed businesses.