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Sharing Wealth through Profits-Interest Plan

Keeping talented employees happy doesn’t have to be financially excruciating.Edward Razim, a partner at Locke Lord Bissell & Liddell LLP, says that one of the best options for a smaller business is something called a profits-interest plan.

Keeping talented employees happy doesn’t have to be financially excruciating.Edward Razim, a partner at Locke Lord Bissell & Liddell LLP, says that one of the best options for a smaller business is something called a profits-interest plan. It’s a variation on profit-sharing that motivates top performers while letting owners maintain total control of their operations and enjoy some attractive tax benefits. Better yet, profits-interest (also called “carried-interest”) plans are relatively simply, says Razim.

In a profits-interest scenario, key employees receive a specified percentage of a company’s earnings, not a discretionary bonus, and treat that compensation as ordinary income for tax purposes. Because the payments in a profits-interest plan represent a legitimate compensation expense, owners can charge payouts against earnings to reduce their business tax. Should a participating employee leave the firm, the unpaid or future profits interest reverts to the company – an important distinction compared with other equity-related compensation schemes.

For more about profits-interest plans, as reported by Forbes,please click here.

About ceo briefing - dec. 7 2010