Hi There! Congratulations! If I were getting a profits interest in an LLC, my questions would be -
How much control do I have over the entity now - am I restricted as to voting and management or am I able to fully participate?
How do I redeem my LLC units if I no longer wish to be a member in the LLC
How will compensation and benefits be handled now that I am no longer an employee?
Will I receive tax distributions to cover the taxable income reported to me on my Schedule K-1?
Will there be more opportunity to purchase additional units in the LLC in the future?
I'm going to assume you aren't aware of the tax implications of a profits interest and just list them below. If you ARE aware, then hopefully it'll help other folks reading here - I saw A LOT of misinformation on the last thread about equity compensation for an LLC.
When your profit's interest or equity interest vests in an LLC, you are no longer an employee of the entity. Members in LLCs and Partners in Partnerships are not employees - their compensation and benefits are treated differently. While the guidance is somewhat unclear, if you make an 83(b) election upon receipt of a profit's interest, you will be treated as if you are a member of the LLC. Since the Rev. Proc. 2001-43 safe harbor treats the recipient of a profit's interest as making an 83(b) election, most likely you should be treated as an LLC member upon grant.
A profits interest entitles the holder to future appreciation in the LLC. A profits interest holder will receive a Schedule K-1 and will incur self-employment tax on the business income reported on the Schedule K-1.
The receipt of a profit's interest is not a taxable event unless the new member is guaranteed a share of future cash flow streams or the partner disposes of the profit's interest within 2 years.
No 83(b) election is necessary for the profit's interest because the IRS does not view the grant as a taxable event. It may still be advisable to file an 83(b) election, though, if you end up failing the safe harbor protection under Rev Proc 2001-43 (like you dispose of your interest within 2 years).
Benefits are treated differently for a member than they are for an employee. Employees are allowed to not include most of the fringe benefits in their compensation. Members must include fringe benefits in their guaranteed payments and self-employment tax computation.
When you dispose of your interest in an LLC, you are generally afforded long-term capital gain treatment (barring "hot assets").