Partnerships and LLCs have the opportunity to make grants of ownership interests tax-efficient with Internal Revenue Code (IRC) Section 83(b) ("Section 83(b) election").
Business entities operating as partnerships for federal tax purposes, including LLCs often consider the grant of an ownership interest in the business as additional incentive compensation for valued employees or contractors. Partnerships may offer ownership interests in the form of a profits interest or a capital interest. On the surface, this appears to be an easy and flexible way of providing a benefit to personnel without affecting current cash flow. There are traps for the unwary, however. Proper structuring of these transactions is critical to ensure optimal tax consequences for both the partnership and the recipients of these awards.