• Corpus ID: 167326200

Two and Twenty: Taxing Partnership Profits in Private Equity Funds

  title={Two and Twenty: Taxing Partnership Profits in Private Equity Funds},
  author={Victor Fleischer},
  journal={Corporate Finance: Capital Structure \& Payout Policies},
  • Victor Fleischer
  • Published 23 March 2006
  • Economics
  • Corporate Finance: Capital Structure & Payout Policies
Private equity fund managers take a share of the profits of the partnership as the equity portion of their compensation. The tax rules for compensating service partners create a planning opportunity for managers who receive the industry-standard "two and twenty" (a two percent management fee and twenty percent profits interest). By taking a portion of their pay in the form of partnership profits, fund managers defer income derived from their labor efforts and convert it from ordinary income… 

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See supra note 156 (discussing tax treatment of common stock in corporate startups)

    It is the habit of most tax professionals to depict partnerships as ovals or circles and corporations as squares or rectangles. For a description of § 83, see supra text accompanying notes

      C) (West 2007) (setting fifteen percent tax rate on most longterm capital gains)

        See supra notes 101, 103 (explaining economic equivalence of profits interest and nonqualified stock option)

          See Scott, supra note 106, at 885-86 (discussing "onerous, costly, and risky valuation rules" for certain equity interests under § 409A)

            § 1(a), (i) (setting top rate of thirty-five percent on ordinary income