A phantom stock plan is a form of long-term incentive plan (LTIP) typically used by privately held businesses. 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. “Plan” shall mean the Golden Grain Energy, LLC Bonus and Phantom Unit Plan as set forth in this document and any amendments hereof. While each phantom equity program is unique, it is common for companies to overlook the following items when designing their phantom equity program. A LAYMAN’S GUIDE TO LLC INCENTIVE COMPENSATION I. and consider some sort of employee equity inventive plan. 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 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. Section 409A structuring challenges if phantom interest holders are intended to share in event-based partnership distributions –Example: Real estate partnership These arrangements are not actual equity and the service provider is … 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. Phantom equity is essentially a cash bonus plan that is designed to mimic the effects of having an ownership interest in a company. 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. Allowing Holders of LLC Equity Interests to Be Treated As Employees 5. 2. A Primer 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. It is possible to create a phantom stock plan that avoids the application of 409A rules. 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 … capital and future profits, a phantom equity plan is generally preferable to a restricted equity plan. 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. The shareholders might approve an additional 100,000 phantom shares. Equity Compensation in Limited Liability Companies 4. I was recently asked to describe the advantages and disadvantages of a phantom equity plan. 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. Fill Llc Phantom Equity Plan Sample, Edit online. 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. EXHIBIT 10.1 CALUMET GP, LLC AMENDED AND RESTATED LONG-TERM INCENTIVE PLAN Section€1. For an LLC that wants to award participants an interest in future profits only, a “profits interest” plan is generally preferable to Phantom equity is If the plan fails to satisfy the requirements of that Sign, fax and printable from PC, iPad, tablet or mobile with pdfFiller Instantly. This results in a “value dilution” potential of 9.1% (100,000 ÷ 1,100,000). 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. Should the company distribute all shares to employees, shareholders would be While the terms vary from plan to plan… Privately held companies have unique organizational traits that require a substantially different approach to executive compensation. 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. 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. s. “Plan Year” means the fiscal year of the Plan, a 12 consecutive month period ending every October 31. Exploring phantom stock issuance as a viable ownership transfer strategy. phantom plan participant as ordinary income and deductible to the company when paid. Phantom equity is incentive compensation designed to mimic the benefits of receiving equity securities. 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. 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. 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. However, in many cases, particularly with closely-held businesses and not-for-profit organizations, the use of real equity is not possible or practicable. 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. Phantom equity plans are particularly useful for private companies without publicly traded shares of stock. Accounting for Equity Compensation in an LLC 6. Phantom stock or phantom equity is an ideal way to share value with key people in your organization without diluting owner equity. 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. 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. What Is a A phantom stock program must meet the requirements set forth by the Internal Revenue Service (IRS) code 409(a). Real equity may also be used as part of a shareholder succession plan – replacing one generation of owners with the next. Equity Incentives Let’s spend a little bit of time now talking about equity incentives and employee compensation. 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. Assuming a net effective ordinary tax rate of 35%, a bonus payment of $576,923 yields after - tax cash of $375,000. 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 … Purpose and History of the Plan . B. Designing However, unlike actual stock, the award does not confer equity ownership in the The Engineering and Construction (E&C) industry is comprised predominantly of privately held and family-run companies. Designing an Equity Incentive Plan 3. The Calumet GP, LLC Long-Term Incentive Plan (the “Plan”) has been adopted by Also known as simulated stock, shadow stock, or synthetic stock, these plans allow key employees to share in Phantom stock qualifies as a deferred compensation plan. 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. Equity Compensation Alternatives – Phantom Interests (cont.) 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 And while […] More flexibility. 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