• Significant changes would need to be made to the operating or partnership agreement. • The service provider becomes a partner and can no longer be treated as an employee for tax purposes and many employee benefit plan purposes. 3. Taxation of Profits Interest If structured appropriately, the grant of a profits interest in exchange for providing services to the company is not a taxable event. However, once the interest is granted, the employee, as a new partner, is subject to pass-through taxation on partnership income. The structure and attributes of a profits interest must be carefully set forth in the operating or partnership agreement to comply with law and qualify for tax-free treatment of the grant. Conclusion Once the equity compensation alternative is selected, the next steps for an employer are to (1) create a plan document, (2) update the company’s governing documents, and (3) ensure the documents are in agreement. Then, the company can issue the awards and draft award agreements for each grantee. To maintain compliance, practitioners should review the legal and tax implications above when advising clients on equity compensation. As long as the proper steps are taken, employers and employees can reap the benefits of equity compensation. Hannah Fischer Frey is a partner and Morgan L. Kreiser is an associate at Baird Holm LLP. Fischer Frey focuses her law practice in the areas of federal and state income tax law and business succession planning. Kreiser works primarily in the area of employee benefits. Fischer Frey and Kreiser work together in advising, drafting, and structuring employee equity plans for their clients. Carrie Schwab is a summer associate at the firm and is a JD candidate at the University of Nebraska College of Law. For more information, contact Fischer Frey or Kreiser at hfrey@bairdholm.com or mkreiser@bairdholm.com, respectively. Contact us today to place your announcement ad Call 801-676-9722 Or scan the qr code to fill out the form. Who to congratulate, who to acknowledge, and who to thank for a job well done. Employees are motivated when they are recognized and feel valued. Nebraska CPA magazine is a great venue to celebrate your team's accomplishments! 19 www.nescpa.org
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