Most New Hampshire multi-member LLCs are and should be taxable as partnerships under Internal Revenue Code Subchapter K, the default federal income tax regimen applicable to these LLCs. This is because, for the members of these LLCs, partnership taxation, due to its extreme flexibility and for other important reasons, will be better for them for federal tax purposes than the other two options available to them — namely, taxation under IRC Subchapters C and S. New Hampshire individuals who are forming multi-member LLCs taxable as partnerships will generally agree in their operating agreements that each of them will share in the LLC’s income and losses in accordance with their respective shares of aggregate capital contributions.

For example, if John and Mary Jones are forming a new New Hampshire LLC to which Mary agrees to contribute $6,000 in cash and John agrees to contribute $4,000, their operating agreement will typically provide that Mary will be entitled to 60% of the LLC’s income and losses and John will be entitled to 40%. In partnership tax terms, John’s and Mary’s contributions are called their “capital accounts,” each of them is called a capital partner, and their capital accounts are treated for federal tax purposes as their shares of the aggregate dollar value of the LLC.

However, an IRS authority designated Revenue Procedure (“Rev. Proc”) 33-27 provides for a very different type of tax partner, called a “profits partner,” and, subject to certain Rev. Proc. limitations, LLCs taxable as partnerships may admit not only capital partners but also profits partners. Under the Rev. Proc., profits partners won’t have to make any contribution for their partnership interests; instead, these interests will be “free” interests. And they won’t incur any federal tax for the receipt of their profits interests. Their initial capital accounts as profits partners will be zero.

It is true that in order to the these tax and financial benefits from their profits interests, profits partners will have to meet three Rev. Proc. requirements. However, these requirements will often be easy for them to meet.

■First, their profits interests may not be interests in an LLC with a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or from a high-quality lease;

■Second, profits partners may not dispose of their profits interests within two years after receiving them; and

■Third, their profits interests may not be limited partnership interests in publicly traded partnerships with the meaning of section 7704(b) of the Internal Revenue Code.

Multi-member LLCs taxable as C or S corporations can’t provide profits interests to their members.

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When a multi-member LLC that has granted profits interests is dissolved and liquidated, its profits interest partners will receive smaller liquidation distributions than they would receive as capital partners. However, the amount of these reduced distributions will often be far less than the amounts of the profits partners’ aggregate profits from their LLCs before their liquidation.

In reviewing for my clients the operating agreements of LLCs drafted by other lawyers, it has become clear to me that New Hampshire LLCs taxable as partnerships should be issuing far more profits interests than they normally do. Here are three typical situations in which these interests can be of great value to New Hampshire LLCs and to their members:

1. Assume that before John and Mary form their LLC, Mary has devoted substantial time and expertise to their LLC-to-be or that she is willing to do so after she and John form it. John and Mary may well want to admit Mary as a profits partner of their LLC as a reward for these services.

2. John and Mary may believe that a third party, Alice Able, can be an excellent manager of their LLC. They may want to grant Alice a profits interest in their LLC in order to induce her to manage it.

3. Assume that John and Mary have two adult children. They may want to admit their children as profits partners of their LLC as part of their estate plan for their children. For example, they may want to provide in their LLC operating agreement that they themselves will each receive 40% of their LLC’s profits but that each of their children will receive 10% despite making no contributions to it. In doing so, John and Mary must be sure to draft their LLC’s certificate of formation and operating agreement and other relevant LLC documents so as to avoid the potential application to them of the so-called “family attribution rules” under Internal Revenue Code section 318. But any competent federal tax lawyer can draft these documents to protect John and Mary from these rules.