Profits Interest

AAA

DEFINITION of 'Profits Interest'

A monetary right awarded to the general partner, investment manager or a service provider of a partnership. The award consists of receiving a percentage of profits from a partnership without having to contribute capital to the partnership. Profits interests are often criticized as recipients can generate large profits for themselves while not incurring sufficient risk.

BREAKING DOWN 'Profits Interest'

This method serves as an incentive for partners to become more proactive in pursuing bigger and better profits thus contributing towards the companies' growth. This situation presents a tax benefit in that beneficiaries of this instrument can be taxed under long-term capital gains versus the higher federal tax rate.

RELATED TERMS
  1. Working Interests

    Refers to a form of investment in oil and gas drilling operations ...
  2. Tax Schedule

    A rate sheet used by individual taxpayers to determine their ...
  3. Federal Income Tax

    A tax levied by the United States Internal Revenue Service (IRS) ...
  4. Operating Profit

    The profit earned from a firm's normal core business operations. ...
  5. Federal Tax Brackets

    Income tax groupings specified by the Internal Revenue Service ...
  6. Partnership

    A business organization in which two or more individuals manage ...
Related Articles
  1. Professionals

    6 Employment Perks And How To Get Them

    Find out how to get more than money from your employer.
  2. Options & Futures

    A Guide To CEO Compensation

    Make sure you assess whether a CEO has a stake in doing a good job for you, the shareholder.
  3. Options & Futures

    How To Owe Nothing On Your Federal Tax Return

    You have the control to determine whether you owe in April. Learn more here.
  4. Options & Futures

    An Investor's Checklist To Financial Footnotes

    Footnotes to the financial statements contain very important information, but reading them takes skill.
  5. Options & Futures

    A Close-Up On Gross Ups

    Learn about this hidden perk and why it's often bad news for investors.
  6. Term

    What is a Prime Brokerage?

    A prime brokerage offers special services to certain clients.
  7. Term

    What is Passive Income?

    Passive income is earned by someone from ventures in which they did not actively participate.
  8. Term

    What are Limited Partnerships?

    A limited partnership involves two or more partners conducting a business, but one is only liable for his capital investment. They are also called silent partnerships or limited liability partnerships.
  9. Investing Basics

    The 3 Best Investments Bill Ackman Ever Made

    Learn about the three best investments Ackman ever made. Ackman has demonstrated a consistent track record of success in all types of market environments.
  10. Entrepreneurship

    How Does Glamsquad Work and Make Money?

    Learn about what Glamsquad does and how it makes money, including why the rise of the "Uber culture" has made this new luxury beauty business so popular.
RELATED FAQS
  1. How are joint ventures regulated in the United States?

    Joint ventures are a very specific type of business arrangement. They can be organized in several different legal structures, ... Read Full Answer >>
  2. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  3. How can I find net margin by looking a company's financial statements?

    In finance and accounting, financial statements represent the fundamental means of analyzing a company's financial position, ... Read Full Answer >>
  4. How is the marginal cost of production used to find an optimum production level?

    The marginal cost of production can be tracked to show the optimal production level where per-unit production cost is lowest ... Read Full Answer >>
  5. What factors make it difficult to compare performance ratios between retail stocks?

    Companies that operate in the retail sector significantly differ in terms of their profitability and efficiency, making stock ... Read Full Answer >>
  6. How do investors interpret the same store sales ratio when analyzing food and beverage ...

    When an investor interprets the same-store sales ratio in analyzing food and beverage stocks, he looks at the monthly same-store ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  2. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  3. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  4. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  5. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  6. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!