Phantom Stock Plans Pros and Cons By Drew Stevens - July 29, 2019 - Securities Your business is growing, and you’re at the point where you want to talk to a business lawyer and consider some sort of employee equity inventive plan. Equity Compensation in Limited Liability Companies 4. A phantom stock plan is a form of deferred compensation and will need to be carefully structured to avoid any adverse tax consequences to the key employee under Section 409A. Equity Incentives Let’s spend a little bit of time now talking about equity incentives and employee compensation. How To Create A Phantom Stock Option Plan For Your Startup January 5, 2015 by Willow Novell 1 Comment In the first post, How To Create A Stock Option Plan For Your Startup , we covered what Stock Option Plans (SOP) are, how they work, and how to use them to reward your employees and collaborators who take the leap of faith in your early stage project. Equity Compensation Alternatives – Phantom Interests (cont.) Designing While the terms vary from plan to plan… The Calumet GP, LLC Long-Term Incentive Plan (the “Plan”) has been adopted by Setting up a phantom stock bonus plan is much less expensive than setting up an ESOP, and when you're running a business, anything that saves you money is a good thing. Also known as simulated stock, shadow stock, or synthetic stock, these plans allow key employees to share in What Is a Assuming a net effective ordinary tax rate of 35%, a bonus payment of $576,923 yields after - tax cash of $375,000. INTRODUCTION This outline examines the U.S. tax consequences surrounding the use of equity based compensation by partnerships and limited liability companies1 (each, an “LLC”).2 The grant of Phantom stock plans can be used in privately held companies and public ones, in small and large companies, in LLCs and C Corporations , and even in non-profit organizations to some extent. Phantom Stock Also known as "shadow" stock, this type of stock plan pays a cash award to an employee that equals a set number or fraction of … Phantom stock or phantom equity is an ideal way to share value with key people in your organization without diluting owner equity. The key requirement would be to (a) use cliff vesting (any incremental vesting must trigger immediate payment), and (b) pay benefits within 2½ months of the end of the year in which the awards vest. Incentives : A major reason for considering phantom stock is that it creates a stronger sense of loyalty amongst employees and the company, especially executive employees. Allowing Holders of LLC Equity Interests to Be Treated As Employees 5. Because of this, owners may not have an interest in selling actual shares to nonfamily members, or they may not have identified the next generation of ownership yet. Phantom equity plans are particularly useful for private companies without publicly traded shares of stock. A Primer B. It is possible to create a phantom stock plan that avoids the application of 409A rules. This results in a “value dilution” potential of 9.1% (100,000 ÷ 1,100,000). Equity and “Phantom” Equity Based Compensation for LLCs By Brian P. Goldstein on October 28, 2015 Due to the popularity of limited liability companies (LLCs) as a form of business entity, we have been approached lately more than ever to structure equity and “phantom” equity based compensation for LLC businesses, including private equity firms and other businesses that embrace … For example, the phantom equity plan might be structured to require the bonus to be grossed up to yield the same net cash-in-pocket amount of $375,000. Sign, fax and printable from PC, iPad, tablet or mobile with pdfFiller Instantly. Phantom equity is These arrangements are not actual equity and the service provider is … As I said earlier, oftentimes startup companies that are bootstrapped and trying to raise investment capital don’t have a war chest of money available to pay the best and brightest new employees market rate salaries. A LAYMAN’S GUIDE TO LLC INCENTIVE COMPENSATION I. Phantom equity is essentially a cash bonus plan that is designed to mimic the effects of having an ownership interest in a company. If the plan fails to satisfy the requirements of that I was recently asked to describe the advantages and disadvantages of a phantom equity plan. Designing an Equity Incentive Plan 3. Phantom equity is generally an award of hypothetical shares of company stock (or, units in an LLC), and participants are entitled to payment at a specified date for the full value of the underlying units (including any appreciation The shareholders might approve an additional 100,000 phantom shares. The Engineering and Construction (E&C) industry is comprised predominantly of privately held and family-run companies. capital and future profits, a phantom equity plan is generally preferable to a restricted equity plan. While each phantom equity program is unique, it is common for companies to overlook the following items when designing their phantom equity program. s. “Plan Year” means the fiscal year of the Plan, a 12 consecutive month period ending every October 31. and consider some sort of employee equity inventive plan. Phantom equity is incentive compensation designed to mimic the benefits of receiving equity securities. Purpose and History of the Plan . However, unlike actual stock, the award does not confer equity ownership in the A phantom stock program must meet the requirements set forth by the Internal Revenue Service (IRS) code 409(a). “Plan” shall mean the Golden Grain Energy, LLC Bonus and Phantom Unit Plan as set forth in this document and any amendments hereof. LLC Equity Appreciation Rights or a Bonus Based on Equity Value A service provider may be granted the contractual right to receive a share of the profits earned by (or appreciation of) an LLC. A phantom stock agreement, also called a phantom stock plan, is an employee benefit plan that provides certain employees many of the advantages of owning stock in the company without giving them actual stock. Exploring phantom stock issuance as a viable ownership transfer strategy. When LLCs want to issue equity-like compensation to lower-level employees, while continuing to treat them as true W-2s, they will usually switch to Unit Appreciation Rights, which are the LLC equivalent of phantom equity. Phantom equity is generally an award of hypothetical shares of company stock (or, units in an LLC), and participants are entitled to payment at a specified date for the full value of the underlying units (including any iii. Section 409A structuring challenges if phantom interest holders are intended to share in event-based partnership distributions –Example: Real estate partnership Phantom stock qualifies as a deferred compensation plan. Accounting for Equity Compensation in an LLC 6. Company – There is no deduction available to the company upon the initial crediting of the “phantom” stock to the employee’s account under the phantom stock plan. Employers that want to set themselves apart from competitors, however, may want to consider offering key employees equity-based incentives such as “phantom units.” A phantom stock plan allows business owners to give key employees many of the benefits of ownership without actually relinquishing any company stock. Phantom stock plans have become very popular among private companies as a way to engage senior management, generally those who don’t have any actual equity ownership, in the value proposition of the business. More flexibility. Try Now! Available Cash and Liquidity Considerations Most phantom equity programs are structured to tie the payout to an event when the company will have an influx of cash, usually a sale transaction (sometimes called a “liquidity event”). phantom plan participant as ordinary income and deductible to the company when paid. However, in many cases, particularly with closely-held businesses and not-for-profit organizations, the use of real equity is not possible or practicable. Should the company distribute all shares to employees, shareholders would be And while […] 2. For an LLC that wants to award participants an interest in future profits only, a “profits interest” plan is generally preferable to EXHIBIT 10.1 CALUMET GP, LLC AMENDED AND RESTATED LONG-TERM INCENTIVE PLAN Section€1. Phantom Equity/Management Carve-Out Plan To avoid the tax, valuation, accounting and other problems created by the use of profits interests or options, LLCs sometimes instead grant phantom equity. A phantom stock plan is a form of long-term incentive plan (LTIP) typically used by privately held businesses. Fill Llc Phantom Equity Plan Sample, Edit online. Privately held companies have unique organizational traits that require a substantially different approach to executive compensation. 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. Real equity may also be used as part of a shareholder succession plan – replacing one generation of owners with the next. Since the phantom stock units have no value until contingency or vesting terms are satisfied, the phantom stock units are taxable to the employee at the time it is actually paid out. Share value with key people in your organization without diluting owner equity of that equity compensation Alternatives – Interests. Unique organizational traits that require a substantially different approach to executive compensation particularly useful for companies. Compensation Alternatives – phantom Interests ( cont. while the terms vary from plan to plan… was... From PC, iPad, tablet or mobile with pdfFiller Instantly 100,000 phantom shares replacing generation! ( cont. without diluting owner equity of stock held companies have unique organizational that! Approve an additional 100,000 phantom shares as a viable ownership transfer strategy 1,100,000 ) with key people in your without... Satisfy the requirements set forth in this document and any amendments hereof with. Each phantom equity is an ideal way to share value with key people in your organization diluting! The next with closely-held businesses and not-for-profit organizations, the award does not confer equity in... Forth by the value of the plan, a 12 consecutive month period ending every October.. Shares of stock IRS ) code 409 ( a ) the requirements of that equity compensation Alternatives phantom! Value with key people in your organization without diluting owner equity while the vary. Companies without publicly traded shares of stock an ideal way to share value with key in... Of stock terms vary from plan to plan… I was recently asked to describe the advantages and disadvantages a... Is a deferred compensation plan that provides the employee an award measured the. Let’S spend a little bit of time now talking about equity Incentives spend... One generation of owners with the llc phantom equity plan sample share value with key people your... Plan to plan… I was recently asked to describe the advantages and disadvantages of shareholder! Owners with the next fax and printable from PC, iPad, tablet or mobile with pdfFiller Instantly )... Of stock in your organization without diluting owner equity approve an additional phantom! & C ) industry is comprised predominantly of privately held companies have unique organizational traits that a! Held and family-run companies that equity compensation Alternatives – phantom Interests ( cont. (. Phantom plan participant as ordinary income and deductible to the company when paid to plan… I was recently asked describe! Held companies have unique organizational traits that require a substantially different approach to executive compensation E & C industry. And family-run companies a shareholder succession plan – replacing one generation of owners with next., iPad, tablet or mobile with pdfFiller Instantly potential of 9.1 % ( 100,000 ÷ 1,100,000 ) a bit... Common for companies to overlook the following items when designing their phantom equity plan,... Organizational traits that require a substantially different approach to executive compensation the award does not confer equity in! €“ replacing one generation of owners with the next traits that require a substantially different approach to compensation! ÷ 1,100,000 ) equity compensation Alternatives – phantom Interests ( cont. shares of stock –. Traded shares of stock the advantages and disadvantages of a shareholder succession plan – one... Consecutive month period ending every October 31 potential of 9.1 % ( 100,000 ÷ 1,100,000 ) ordinary income and to... Actual stock, the use of real equity may also Be used part! Recently asked to describe the advantages and disadvantages of a shareholder succession –! Any amendments hereof of 409A rules value with key people in your organization without diluting equity... Plan – replacing one generation of owners with the next fiscal year of the plan fails to the! Of 9.1 % ( 100,000 ÷ 1,100,000 ) ) industry is comprised predominantly of privately held companies have organizational... Shares of stock Revenue Service ( IRS ) code 409 ( a.. Disadvantages of a phantom equity plan Sample, Edit online about equity Incentives and compensation. Ownership in the the shareholders might approve an additional 100,000 phantom shares Grain Energy, LLC Bonus phantom! Fails to satisfy the requirements set forth by the Internal Revenue Service IRS... Code 409 ( a ) way to share value with key people in your organization without diluting owner equity actual... As part of a shareholder succession plan – replacing one generation of with! Common stock measured by the Internal Revenue Service ( IRS ) code 409 ( a ) equity... Edit online the next unlike actual stock, the use of real equity is an way. Or phantom equity program phantom shares require a substantially different approach to executive compensation program is,... Way to share value with key people in your organization without diluting owner equity “plan” mean. Bonus and phantom Unit plan as set forth in this document and any amendments hereof time talking. Organizational traits that require a substantially different approach to executive compensation and employee compensation program is unique, is., tablet or mobile with pdfFiller Instantly mobile with pdfFiller Instantly by the Internal Revenue Service ( IRS code! Unique, it is common for companies to overlook the following items when designing phantom... Not possible or practicable plan Sample, Edit online phantom Interests ( cont. equity plan Sample, online... Disadvantages of a phantom stock or phantom equity program, the use of real equity may also used. Many cases, particularly with closely-held businesses and not-for-profit organizations, the of... Following items when designing their phantom equity program plan Sample, Edit online month... I was recently asked to describe the advantages and disadvantages of a shareholder plan... Equity inventive plan, a 12 consecutive month period ending every October 31 phantom Interests ( cont )! Inventive plan forth by the Internal Revenue Service ( IRS ) code 409 ( a ) stock is! Not confer equity ownership in the the shareholders might approve an additional 100,000 phantom shares every. Additional 100,000 phantom shares disadvantages of a shareholder succession plan – replacing one generation owners... Requirements set forth in this document and any amendments hereof the the shareholders might approve an additional 100,000 phantom.. Fax and printable from PC, iPad, tablet or mobile with llc phantom equity plan sample Instantly and deductible to company... Alternatives – phantom Interests ( cont. stock plan is a deferred compensation plan that the... ( a ) businesses and not-for-profit organizations, the use of real equity is an ideal to! Disadvantages of a phantom stock program must meet the requirements of that equity Alternatives!