Many LLCs want to offer employees the economic benefits of equity ownership without triggering the tax and administrative burdens of making them partners. This guide provides a practical roadmap for designing and implementing an Aggregator Entity structure (often called a Management Holding LLC), an approach that preserves W-2 employee status while aligning employees with company growth.
What is an Aggregator Entity?
An Aggregator LLC holds Profits Interests on behalf of employee participants. Instead of granting Profits Interests directly, an action that would make employees partners, the operating company grants the interests to the Aggregator, which in turn shares economic benefits with employees via contractual rights. Note that while participants maintain their W-2 status, they become K-1 owners in the Aggregator. The LLC agreement can be structured so that employees only see gains when the business exits, keeping their K-1 simple in the meantime.
Steps to Implement Profits Interests via an Aggregator
1. Establish the Aggregator LLC
The Aggregator is typically structured to mirror the operating LLC. Draft the Aggregator’s Operating Agreement to be similar to the operating LLC’s operating agreement in terms of organization, governance, profits interest units and related allocations, etc. Secure an EIN and set up a bank account to support its operations.
2. Update the Operating Agreement of the Parent Company
Review and amend the operating agreement of the primary LLC to ensure it permits the issuance of Profits Interests with the appropriate features.
3. Refresh Company Valuation
Conduct an updated valuation to establish the hurdle rate,the threshold above which participants share in future value appreciation.
4. Develop Legal Documentation
Create detailed Plan Documents and Grant Agreements that clearly articulate terms, vesting, and participant rights. This typically includes:
• Participation agreements that define who is eligible
• Vesting schedules (time- or performance-based)
• Liquidity provisions and exit mechanics
5. Implement Administration & Recordkeeping
Select software for tracking awards and participants. Consider outsourcing to ensure proper governance and scalability.
6. Address Compliance and Tax Considerations
Facilitate § 83(b) elections for tax planning and assess whether ASC 718 valuation is required for accounting purposes.
7. Manage Ongoing Tax & Reporting
Issue Schedule K-1s for the Aggregator and fulfill annual LLC reporting obligations.
8. Ongoing Program Management
Conduct annual valuations, refresh waterfall models, manage forfeitures, and prepare for future liquidity events (typically no sooner than two years after grants).
Why Consider This Approach?
Though it might seem complex, the Aggregator structure enables LLCs to offer true alignment with value creation without disrupting employment status or payroll operations. For organizations prioritizing alignment and retention, this structure provides a sophisticated, tax-efficient solution that supports long-term value creation. When paired with proactive employee communication, the Aggregator model enhances retention by giving participants a clear, ownership-like stake in the company’s growth.
How Can Infinite Equity Help?
Implementing a Profits Interest program through an Aggregator entity requires precision, coordination, and expertise across legal, tax, accounting, and compensation disciplines. Infinite Equity has deep experience guiding organizations through this process, from initial design through execution and ongoing administration. We ensure your program is compliant, transparent, and compelling,so employees understand it, auditors respect it, and your leadership team sees it drive retention and performance. Reach out to Infinite Equity to learn how we can help you.
