What Are the Best Practices for Administering Incentive Compensation by LLCs Taxed as Partnerships?

In the 19th installment of our Incentive Compensation series, we’re about to reveal the secrets behind administering incentive compensation seamlessly and effectively for LLCs taxed as partnerships. Immerse yourself in this captivating guide as we unravel the best practices that will not only elevate your incentive compensation approach but also ensure that your team remains motivated and engaged.

Choosing the Right Navigator: Identifying the Ideal Plan Administrator

The first essential step in successfully administering an incentive compensation plan for partnership-taxed LLCs is determining who will oversee it. The plan administrator could be the board of directors, a compensation committee, another designated committee, or one or more officers chosen by the board of directors or the compensation committee.

On top of that, it’s crucial to provide the plan administrator with ample authority to interpret and manage the plan. Conventional language in the plan’s administrative provisions grants the administrator the power to construe disputed or doubtful terms and make reasonable interpretations. Their scope of authority should encompass selecting participants, determining the type and amount of awards, and interpreting the plan.

Creating a Dedicated Reserve: Best Practices for Interest Grants

A key best practice in administering incentive compensation for LLCs taxed as partnerships is the strategic allocation of membership units. By setting aside a dedicated reserve of these ownership interests, your company can effectively design a compensation plan that drives success and keeps your team motivated. This carefully crafted pool of incentives ensures a streamlined approach to rewarding your most valuable contributors while maintaining their engagement and commitment.

Share Recycling: A Streamlined Strategy for Partnership-Taxed LLCs

Incentive compensation plans for partnership-taxed LLCs must carefully address how to handle equity awards subject to expiration, forfeiture, cancellation, or cash settlement. These events could be triggered by the termination of team members or by significant company events susch as mergers or acquisitions. The key question is whether these awards will again be made available for issuance under the plan. The plan should clearly address the impact of such events upon the maximum number of units for each type of membership interest available for issuance under the current plan.

Optimal Award Adjustments for Partnership-Taxed LLCs

Partnership-taxed LLCs should attentively manage award adjustments during corporate events, ensuring equity award holders’ rights remain balanced and protected. Events that necessitate adjustments include mergers, consolidations, reorganizations, recapitalizations, and capital structure changes. Although plan administrators may have discretionary authority, equitable adjustments must be consistently applied across equity restructurings and corporate events. Key aspects to consider include substituting or adjusting interests, modifying outstanding awards, altering exercise prices, and assessing value determinations like performance targets for vesting.

Document Preservation: Upholding Incentive Compensation Integrity

The diligent safeguarding of documentation is crucial for partnership-taxed LLCs overseeing incentive compensation plans. As emphasized in Article 17 of our series, it is essential to retain essential records such as the operating agreement, grant approval records, signed documents from team members, and even copies of Section 83(b) filings by team members, complete with mailing proof. Upon the company’s sale, potential acquirers may request these documents, underscoring the significance of systematic record-keeping.

Moving Forward

We hope this article has been informative and useful for your business. If you have any questions or comments, please contact us at info@wilkinsonlawllc.com. We plan to answer general questions in an upcoming FAQ series. If you need legal advice specific to your situation, please ask to schedule a consultation with an attorney to discuss your company’s goals.

Join us tomorrow for the final installment of our series, Article 20, where we will delve into evaluating and measuring the success of incentive compensation for partnership-taxed LLCs.

This article is for informational purposes only and should not be relied upon as tax or legal advice. Please consult professionals for advice tailored to your specific situation. The author and publisher assume no responsibility for any errors or omissions or for any actions taken based on the information presented.