This is not tax advice, this is my personal interpretation. Do your own research. Perhaps profits units contain a microchip or the earth is trigonal planar, who knows.

The goal of Rocicorp is to create a great place to work where we build useful stuff and share the returns fairly amongst the team.

The goal is not to maximize early shareholder value or to accumulate profits to a subset of the team (eg, the "top" or the early partners). Rocicorp operates like a partnership, a collective endeavor where team members work with each other and not for the company or leadership. Rocicorp is a vehicle by which partners earn a good living, and as such it favors those actively contributing.

Structure

Rocicorp is an LLC taxed as a partnership. Participants are technically "members", but we frequently use the term "partner" because it is more familiar and evocative. For the purposes of taxes, Rocicorp is a pass-through entity, meaning that every dollar gained or lost is allocated to the (virtual) "capital account" of one of the partners. The sum of all the partner accounts must equal the net dollars in or out of Rocicorp. Gain or loss associated with a partner's account is passed through to the individual, to be accounted for in their tax returns.

Partnership in Rocicorp confers no control. There is a single Manager who has ultimate decision-making power by virtue of holding the decision-making Class A profits units. The rest of us have Class B profits units which confer no control. The Manager is Aaron Boodman, and while in principle he holds 100% of the decision-making power, decisions are largely driven by consensus. In the event that Aaron is eaten by a shark, members vote on a replacement Manager.

Salary

As an LLC taxed as a partnership, Rocicorp partners are not employees, so Rocicorp technically does not pay them salary. Instead, Rocicorp makes guaranteed payments, payments that are guaranteed while actively participating in the LLC.

Our goal for guaranteed payments is to provide an adequate income pre-profitability and an a generous income post-profitability. The way this works is:

Profit Sharing

It is a goal of Rocicorp to share profits fairly, meaning we would like to:

Unlike equities, receiving profits units is not a taxable event because it transfers no value. Rather, it entitles the holder to future growth of value and profits. As the value of the company increases, the value of the profits units will increase as well. However, like equities, there is no taxable event to profits units holders until the profits units are transferred or sold. When transferred or sold, the holder realizes the gain on the difference between the value at which transferred or sold and that at which it was received. Holders cannot participate in any increase in value or profit that occurred before their profits units were received.

A profits unit entitles one to a share of Rocicorp's net profit, meaning gross revenue less expenses, guaranteed payments, active member allocations, and investor payments [see below]. Profits are allocated to partners pro rata according to vested profits units. Allocating profit to a partner is a taxable event: the partner owes tax on the allocation whether it has been actually distributed to the partner or not. Allocated profits are distributed to partners at the manager's discretion, for example distributions might be twice per year, and on an as-needed basis when a partner needs money to cover taxes on an allocation.

Senior Partners