A Layman's Guide To LLC Incentive Compensation

I. INTRODUCTION

This outline examines the U.S. tax consequences surrounding the use of equity based compensation by partnerships and limited liability companies¹ (each, an "LLC").² The grant of compensatory LLC equity interests and the vesting of restricted LLC equity interests raise some of the thorniest issues of Subchapter K, including the necessity of bookups, the occurrence and effect of capital shifts and other hypothetical transactions, and the ancillary tax consequences of a service provider becoming a member.³

These issues are discussed in detail in Section II of this outline and are also discussed briefly in subsequent sections with respect to different types of LLC interests. Sections III through VI discuss the federal income tax consequences to service providers, LLCs and other LLC members of granting restricted and unrestricted capital and profits interests, options to acquire LLC interests, and virtual options such as equity appreciation rights.