A phantom equity owner is entitled to payments related to certain trigger events. These trigger events are presented either in the Phantom Equity Plan or in the Phantom Equity Agreement. There is great flexibility for a company in designing its own phantom equity plan and payments in which Phantom Equity holders participate. This quickly leads to reflection on the impact it could have if the Phantom equity bonus were extrapolated so that it generates in the pockets of employees the same net after-tax money they would have obtained with a capital interest rate. For example, the Phantom Equity plan could be structured so that the bonus is extrapolated to obtain the same net cash-in-pocket amount of $375,000. Based on a net effective tax rate of 35%, a bonus of $576,923 after tax after tax is $375,000. This is the second article in a series that examines when an entrepreneur should consider equity or equity-like investments in his or her business and, if so, how this equity or equity subsidy can be properly structured. To see the first article in this series, click here. Today`s theme: Phantom Equity. There are many additional benefits of the multiplied phantom action strategy; z.B. there are no K-1 and W-2 Schedules associated with problems and complications for employees who do not otherwise seek property. There is no need for additional state registrations for the same employees.
There are no property complications when employees come and go. They can be moved relatively easily in the plan, while the property remains in the hands of those who devote themselves to the business. The only main restriction on the use of the phantom private equity plan is that major entrepreneurs must have sufficient decent income during the year when phantom equity bonuses are paid to take full advantage of the normal tax deduction. The value of the phantom units can be determined by an agreed procedure, based on the fair market value set by the members, by a written formula defined in the enterprise agreement, predetermined or determined by an evaluation. No tax is paid on the issuance of units. However, they are taxed as normal income when paid as a result of a liquidity event such as the sale of the LLC. They may also be related to staff bonuses and not to liquidity events. If z.B. the turnover exceeds a certain number, each phantom unit would earn a predetermined amount. As a business grows and some employees become more valuable, members may want to reward them with equity in the LLC and consider offering them membership shares. The approach may work for some companies, but members should exercise the utmost caution when deciding whether to transfer an affiliate interest to a senior staff member (and then grant the individual and those units certain rights to the LLC`s operating contract).