The following is quoted from IRS Pub 541
Contribution of Services
A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed.
A capital interest is an interest that would give the holder a share of the proceeds if the partnership's assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. This determination generally is made at the time of receipt of the partnership interest. The fair market value of such an interest received by a partner as compensation for services must generally be included in the partner's gross income in the first tax year in which the partner can transfer the interest or the interest is not subject to a substantial risk of forfeiture. The capital interest transferred as compensation for services is subject to the rules for restricted property discussed in Publication 525 under Employee Compensation.
The fair market value of an interest in partnership capital transferred to a partner as payment for services to the partnership is a guaranteed payment, discussed earlier. Profits interest.
A profits interest is a partnership interest other than a capital interest. If a person receives a profits interest for providing services to, or for the benefit of, a partnership in a partner capacity or in anticipation of being a partner, the receipt of such an interest is not a taxable event for the partner or the partnership. However, this does not apply in the following situations.
The profits interest relates to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease.
Within 2 years of receipt, the partner disposes of the profits interest.
The profits interest is a limited partnership interest in a publicly traded partnership.
A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests.
Basis of Partner's Interest
The basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. If the partner must recognize gain as a result of the contribution, this gain is included in the basis of his or her interest. Any increase in a partner's individual liabilities because of an assumption of partnership liabilities is considered a contribution of money to the partnership by the partner.
Interest acquired by gift, etc.
If a partner acquires an interest in a partnership by gift, inheritance, or under any circumstance other than by a contribution of money or property to the partnership, the partner's basis must be determined using the basis rules described in Publication 551.
Comments: The "voting" interest has no pecuniary value, so it is not of interest to the government. California law expressly permits LLC members to craft their ownership interests as they wish.
The capital interest receives the profit from the sale of the business (the capital gain). The profits interest receives the profit from the income stream of the ongoing business. Each is a profit, different in kind, and taxed differently.
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