Profits Interest Plan

For Informational Purposes Only

The equity compensation blueprint for LLCs — give your team a stake in future upside without triggering a tax bill at grant.

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What This Document Does

A Profits Interest Plan is the LLC equivalent of a corporate stock option plan. It creates a formal framework for granting “profits interests” — a special class of membership interest that entitles the holder to share in future appreciation above a specified threshold (the “hurdle”) without receiving any value on the grant date. When structured correctly under Revenue Procedures 93-27 and 2001-43, profits interests are not taxable at grant, making them the most tax-efficient way for an LLC to compensate founders, employees, advisers, and key contributors with equity upside.

This template establishes the plan pool, defines who is eligible for awards, sets the rules for how the board of managers administers grants, and builds in the vesting, forfeiture, call-right, and change-in-control mechanics that sophisticated investors expect to see. It is designed to work alongside — and remain subordinate to — the company’s LLC operating agreement.

Plan Pool and Authorization

The plan reserves a fixed number of incentive units — typically 10–20% of fully diluted equity — for future grants. Units that are forfeited when someone leaves before vesting recycle back into the pool. This lets the company make grants without going back to the members for approval each time, while capping total dilution.

Profits Interest Hurdle

The hurdle is the economic threshold that makes a profits interest tax-free at grant. It equals the amount that would be distributed to senior interests if the company were liquidated on the grant date. If the hurdle is set correctly, the incentive unit has zero liquidation value at grant — which is the foundation of profits-interest tax treatment. The plan requires the administrator to set each hurdle using a contemporaneous liquidation-value analysis.

Vesting and Forfeiture

Awards vest over time (typically four years with a one-year cliff), and unvested units are automatically forfeited when service ends. The plan supports single-trigger acceleration (all units vest on a change in control), double-trigger acceleration (units vest only if the recipient is also terminated), or no acceleration — selectable per award agreement.

Company Call Right

When a participant leaves, the company may want the ability to repurchase vested units rather than having a departed employee remain on the cap table indefinitely. This section permits (but does not require) a call right, and defaults to fair market value without minority or marketability discounts — protecting the departing participant from being squeezed on price.

Tax Matters and Section 83(b)

The plan makes clear that the company does not guarantee profits-interest tax treatment and that each participant is responsible for their own tax advice. It addresses the Section 83(b) election question directly: some tax advisers recommend a protective filing even when Revenue Procedure 2001-43 may make it unnecessary. The plan leaves this to each participant and their adviser rather than mandating a one-size-fits-all approach.

Revenue Procedure 2001-43 Administration Module

Modern plans increasingly include an express election to treat the recipient as the owner from grant for tax purposes, with the company and recipient agreeing to report allocations throughout the restricted period and claim no compensation deduction at vesting. This locks in the profits-interest treatment operationally rather than relying on intent alone.

Grant-Screening Exclusion Schedule

Best practice now requires tax counsel to screen each grant against the Revenue Procedure 93-27 exceptions before issuance: substantially certain income streams, dispositions within two years, publicly traded partnership interests, non-service consideration, and grants made too close to a planned liquidity event. Plans that skip this step risk having the IRS recharacterize a profits interest as a capital interest taxable at grant.

Digital Equity Records and OISP/DSP Compliance

As states adopt the Uniform Unclaimed Property Act and digital securities protocols, plans should contemplate electronic issuance, digital cap-table integration, and compliance with emerging Online Issuance Service Provider and Digital Securities Platform requirements for tracking and reporting equity grants.

1. Confirm your entity structure. This plan is designed for an LLC taxed as a partnership. If your company is a C-corporation, use the Equity Incentive Plan template instead.

2. Review your LLC operating agreement. The plan is subordinate to your operating agreement. Make sure the operating agreement authorizes the incentive unit class, defines the distribution waterfall, and permits the board of managers to administer equity grants.

3. Set the plan pool. Fill in the total number of incentive units and the percentage of fully diluted equity they represent. Common ranges are 10–20%.

4. Engage tax counsel. Profits interest plans require partnership-tax expertise. Before making your first grant, have counsel confirm the hurdle methodology, prepare the liquidation-value analysis, and determine whether to adopt the Revenue Procedure 2001-43 administration module.

5. Adopt by board consent. The board of managers adopts the plan by written consent. Use together with the companion Profits Interest Award Agreement template for individual grants.

Disclaimer. This template is for informational purposes only and does not constitute legal or tax advice. Profits interest plans involve complex partnership-tax issues that require review by qualified counsel. No attorney-client relationship is formed by downloading or using this form. If you would like Montague Law to review or customize this document for your company, contact us.