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Can an LLC have a phantom stock plan?

Can an LLC have a phantom stock plan?

Most LLCs, however, are not taxed as corporations, but rather are taxed as partnerships (if they have more than one member). For these LLCs, the equivalent of an employee stock ownership plan and incentive stock options are not available.

Can you sell phantom stock?

If the company had used actual stock, those would have to be repurchased, which would make things more complicated. No voting rights. Since phantom shares are not the same as real stock, you don’t have to worry about employees voting down key decisions, such as selling the company.

What is a phantom stock agreement?

A phantom stock plan is a deferred compensation plan that provides the employee an award measured by the value of the employer’s common stock. However, unlike actual stock, the award does not confer equity ownership in the company. In other words, there is no actual stock given to the employee.

How do you make a phantom stock plan?

A 5-Step Plan for Creating a Phantom Stock Program That Will Motivate Employees and Keep You in Control

  1. Understand what you are – and aren’t – offering.
  2. Set a proper valuation.
  3. Create your shares.
  4. Decide how to award stock.
  5. Set a reward schedule.

What are profits interests in an LLC?

An easy and tax-efficient way for a partnership (or limited liability company, or LLC) to grant equity interests to key employees or service providers to motivate and reward them to grow the business involves the grant of something called a “profits interest.” A profits interest is an interest in the future profits and …

What is phantom equity in LLC?

Phantom equity gives the recipient the right to receive a bonus equal to the increase in value of capital interests in the LLC.

How is phantom stock value calculated?

The answer involves two variables: (a) the presumed value of the company, and (b) the number of shares to be used in the plan. Once these two answers are known, the phantom share price is calculated as the former (the value) divided by the latter (the number of shares).

Can a profits interest be granted to an LLC?

Can an LLC receive a profits interest?

For LLCs that are taxed as partnerships, the closest equivalent to a stock option in a corporation is called a “profits interest”. If you grant an individual a profits interest in an LLC, that individual is receiving an interest in both the future profits of the LLC, and the appreciation of the assets of the LLC.

What do you need to know about phantom stock agreements?

Phantom stock plans are deferred compensation agreements that award employees based on the value of the company stock. The award, since it’s not actual stock, doesn’t give employees any ownership rights in the company. The agreement outlines a monetary reward at an agreed upon date or event in the future.

Can a phantom stock plan be considered a qualified plan?

Employee stock ownership plans (ESOP) and 401 (k) plans are qualified plans that are considered legal under ERISA. However, ERISA prevents non-qualified plans to act like qualified plans, and phantom stock, if given to a large percentage of employees, may be seen as a non-qualified plan.

What happens to phantom stock when an employee leaves?

Phantom shares are only paid out if the employee meets certain terms. If an employee leaves the company before those terms are met, the phantom stocks disappear. If the company had used actual stock, those would have to be repurchased, which would make things more complicated. No voting rights.

How to award phantom stock to your employees?

Decide how to award stock. There are three different ways to award phantom stock: 1) Full value grant. Give employees shares valued in full at the price you established in your valuation. In the example above, an employee given 5,000 shares would be entitled to cash in those shares for $50,000 at a future date you determine.

Who are the grantees of the phantom stock agreement?

WMS Industries Inc., a Delaware corporation (the “Company”), hereby grants to «Full_Name» (the “Grantee”, also referred to as “you”) shares of its phantom stock (the “Phantom Stock”), pursuant to the terms of the attached Phantom Stock Agreement and the 2009 Restatement of the WMS Industries Inc. Amended and Restated Incentive Plan (the “Plan”).

How does a phantom stock plan work for employees?

In other words, there is no actual stock given to the employee. Instead, the employee is granted units of phantom stock, and the plan provides that each unit is equal in value to one share of common stock. Q. Why might a company want to issue phantom equity instead of actual equity?

What happens to phantom stock when it matures?

When phantom stock matures, companies will either pay employees the cash value of the shares or, less often, convert the phantom shares into actual stock. For company owners, phantom stock can help grow their business.

How much do you get for phantom stock?

An employee with phantom stock options at $10 would receive $40,000 once EBITDA value rises high enough to bring the phantom stock price up to $18. When in doubt, phantom stock options are usually the best way to award stock.