LLC Blueprints

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LLC Blueprints

A step-by-step guide to building an employee equity plan

Giving employees an ownership stake in your company can help build a foundation for growth. Using different forms of equity, LLCs can attract and retain employees—and ensure they are invested in the company’s success.

Your step-by-step blueprint

Learn how to choose the right equity plan for your company
Understand Icon

Understand:

How different LLC equity types work

Identify Icon

Identify:

The type that fits your company’s needs

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Implement:

Our step-by-step guide to get started

DISCLAIMER: This publication contains general information only and Carta is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.

Starting your journey: Six LLC equity types to consider

Select any type for a deeper dive, and download the complete guide to share and compare

LLC Blueprints
Profit interest units (PIUs)

The most common equity type for LLCs, profits interest units (PIUs) are a good way to incentivize employees to help grow the company.

 

Best if you want a plan that:

  • Gives recipients a share of future appreciation in the company
  • Makes them an owner of the business on the date of the grant
  • Doesn’t cost recipients anything to acquire
  • Provides tax advantages for recipients
  • Doesn’t affect potential payouts for existing members on current value of LLC

 

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PIUs with a catch-up provision

Profits interest units with a catch-up provision have greater economic value compared to regular PIUs and may help attract key hires.
 

Best if you want a plan that:

  • Gives recipients a share of future appreciation as well as existing company value payable out of future profits
  • Makes them an owner on date of grant
  • Doesn’t cost recipients anything to acquire
  • Provides tax advantages for recipients
  • Doesn’t affect potential payouts for existing members on current value of LLC

 

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Home card - PIUs separate holding
PIUs with a separate holding company

This version of regular PIUs can be useful if you want employees to continue receiving W-2s and avoid self-employment taxes.
 

Best if you want a plan that:

  • Allows recipients to retain employee status for benefits and tax purposes
  • Gives them a share of future appreciation in the company
  • Doesn’t cost recipients anything to acquire
  • Provides tax advantages for recipients
  • Doesn’t affect potential payouts for existing members on current value of LLC

 

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Home card - Phantom Equity
Phantom equity

Phantom equity entitles a holder to receive an annual share of revenue and/or a percentage of deal proceeds when a company is acquired or goes public.

 

Best if you want a plan that:

  • Is like a bonus that mirrors equity but doesn’t involve an actual equity stake
  • Allows recipients to retain employee status for benefits and tax purposes
  • Gives them a share of future appreciation in the company and/or future annual profit distributions
  • Doesn’t cost recipients anything to acquire

 

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Home card - UARs
Unit appreciation rights (UARs)

A variation of phantom equity, UARs involve cash bonuses tied not to a goal, but to how much the company grew in value during the employee’s tenure.

 

Best if you want a plan that:

  • Allows recipients to retain employee status for benefits and tax purposes
  • Gives them a share of future appreciation in the company but generally only after the award is exercised or settled
  • Doesn’t cost employees anything to acquire

 
 

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Home card - Options
Options to acquire interests

Like corporate stock options, they give the recipient the option to become an equity-holder in the company when they choose to exercise their option.

 

Best if you want a plan that:

  • Gives them a share of future appreciation in the company and/or annual profit distributions
  • Allows employees to retain employee status for benefits and tax purposes until options are exercised or settled
  • Includes a stake in the existing value of the company, not just future growth

 

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Unit/membership interests, the LLC equivalent of company stock, are typically only granted very early in the life of an LLC, so we are not including them here as a form of equity compensation to consider giving employees.

Comparing the six equity types

Highlight Profits interest units (PIUs) PIUs with catch-up PIUs with separate holding co. Unit appreciation rights (UARs) Phantom equity Options to acquire interests
Incentives aligned between company, employees
Free for employees to acquire
Holder’s upside includes share of future appreciation of the business
Holder’s upside can also include share of existing company value
Payout protection for existing members on current value of LLC
Employees can retain employment status
Easier for LLC to implement 

Comparing the tax treatments for each type

Profits interest units (all three types)

When granted: No taxes owed

When vested: No taxes owed; 83(b) election typically filed at time of grant

When cashed out: Usually taxed as long-term capital gains if holding periods are met

For company: No tax deduction at time of grant or in the event of liquidity

Options to acquire interests

When granted: No taxes owed
When vested: No taxes owed if unexercised
When exercised: Taxed as ordinary income
When cashed out: Taxed as long-term capital gains if holding periods are met
For company: Generally deductible as a compensation expense when employee pays ordinary income on exercise

Unit appreciation rights

When granted: No taxes owed
When vested: No taxes owed
When cashed out: Taxed as ordinary income
For company: Generally deductible as a compensation expense when holder receives cashed payment

Phantom equity

When granted: No taxes owed
When vested: No taxes owed
When cashed out: Taxed as ordinary income
For company: Generally deductible as a compensation expense when holder receives cashed payment

General summary only; consult tax professionals for guidance.
Ready to learn more on each equity type?
PIUs PIUs with catch-up PIUs with holding co. Unit appreciation rights Phantom equity Options to acquire interests

Have specific questions?

Read more in-depth analysis from our expert legal partners

I want to give employees a share of the company’s future growth, and I don’t want them to have to pay for it. What works best?

Equity plans are a great way to incentivize employees, especially because they do not require a cash payment to acquire and come with significant tax advantages.

 

Read more

My company is thinking of converting to a C-Corp— which type should I choose?

For companies seeking to make a transition to a different business structure—whether in pursuit of venture capital financing or for other reasons—profits interest plans offer the best pathway.
Read more

My company wants to set up a plan for lower-level employees and upper management—can I combine two types of equity?

Growing businesses frequently seek to incentivize two or more groups of employees that have different incentives and performance goals. The solution: customizing separate plans for each group.
Read more

I’m looking for a tax-efficient plan for employees that lets them retain their status as employees, and not become members of the LLC. Which plan would be best?

Issuing equity to a W-2 employee turns them into a “partner” for tax purposes—which can result in the recipient losing certain employee benefits. Fortunately, there is an equity type that addresses that.
Read more

I’m trying to make a key strategic hire and need to know how to “sweeten the deal” with a more inclusive equity plan. What should I do?

A typical profits interest grant places limits on how much a recipient can benefit from an LLC’s sale. But there’s a way to enhance that potential payout so some hires can “catch up” to other shareholders.
Read more

Making our employees into owners has taken our culture to the next level. Employee ownership creates alignment and increases engagement. Nobody cares more than an owner.
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Thomas Dudley
CEO, Certified EO

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A very special thank-you to the experts who generously contributed content and their expertise to Carta’s LLC Blueprints: Haley Ayure, Attorney and Counsel; John McGrady, Attorney and Shareholder, Buchanan Ingersoll & Rooney PC. Andrew Gilbert, Partner; Patrick Croke, Partner; and Meredith Christianson, Associate, Croke Fairchild Duarte & Beres. Wendy Moore, Partner, Perkins Coie. Peter Elias, Partner; Josh Pollick, Partner, Orrick, Herrington, and Sutcliffe LLP. Wendy Heilbut, Managing Partner, Heilbut LLP. Candace Groth, Senior Attorney; Kevin Vela, Managing Partner, Vela Wood.