Use by Hedge Fund Managers of Profits Interests and Other Equity Stakes for Incentive Compensation

Private fund management companies, which are typically taxed as partnerships, often wish to incentivize key people with equity or equity-like interests in the management company.  A recent event examined the key elements of partnership taxation and considered the four available means of providing equity interests to employees and other service providers: profits interests, capital interests, options and phantom interests.  The discussion chiefly focused on profits interests, as such interests receive the most favorable tax treatment.  For discussion of another presentation on this topic, see “How Can Hedge Fund Managers Use Profits Interests, Capital Interests, Options and Phantom Income to Incentivize Top Portfolio Management and Other Talent?,” Hedge Fund Law Report, Vol. 6, No. 33 (Aug. 22, 2013).

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