This form is used when Assignor grants, assigns, and conveys to Assignee a percentage of the net profit interest in the Working Interest. The Net Profits Interest is the stated percentage interest in the share of monies payable for gross production attributable to the Working Interest less the costs and expenses attributable to the Working Interest.
Wisconsin Assignment of Net Profits Interest
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US-OG-303
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FAQ
A profits interest represents an actual interest in the ownership of a partnership. As such, it differs from a stock option (another form of awarding an ownership stake), which grants to the holder a right to buy into a company at a time in the future.
The liquidation threshold is oftentimes referred to as the distribution or hurdle threshold. This threshold is set at a level such that the profits interest would be entitled to $0 of the LLC's exit proceeds if the LLC were to hypothetically ?liquidate? on the profits interest's grant date.
A profits interest in an LLC is a legal form of equity and will make the recipient a partner or member of the LLC for tax purposes.
A profits interest serves as an incentive for partners to become more proactive in pursuing greater profitability, thus contributing to the companies' growth. It also provides a tax benefit to recipients, as all appreciation in value is taxed as long-term capital gains rather than as ordinary income.
Typically, a profits interest unit is a derivative of the company's total equity value vis-a-vis the capital units at any time. The stock price then must be the company's total equity value, which requires that all the equity classes be considered in the approach. Strike price (X).
Profits interests can be granted immediately or vested over time, based on personal performance and/or corporate success. In addition, the garnishing value components of the profits interest, like the share of annual profit allocation, and liquidation value, can be customized.
Properly designed, profits interests convey an ownership share of future profits and equity upside without a capital stake in the past. This powerful incentive plan requires no buy-in; is not taxable at grant or vesting; and, its capital liquidations are taxed as capital gains.
From an accounting perspective, profits interest is generally accounted for under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 718 Stock Compensation or FASB ASC 710 Compensation.