Hello,
Can someone explain the difference between a net profits interest and a royalty (the royalty being held by the mineral interest owner)? Also, economically which type of interest would be preferred and pays out more? I'm asking this question in the context of co-owners of mineral interests, with the non-developing co-owners entitled to their share of the "net profits" while the developing co-owners receive a "royalty" pursuant to the terms of the lease.
Thanks,
Royalty or overriding royalty is always better - comparing apples to apples (percentages to percentages).
A net profits interest by its name implies that it is derived after deducting expenses from some gross income figure. Unless you are prepared to audit the company creating and deducting those expenses, you would be far better off with a straight royalty or overriding royalty.
I believe you are asking an IRS question. Royalty is passive income and taxed as such. Net Profit income denotes a business income and is taxed and reported differently. Usually, the oil/gas driller and their partners are the only ones entitled to this treatment. Usually all co-owners of mineral interests are all passive unless one of them is the driller. You need to ask your CPA this question.
People who are due that treatment are those that have negotiated that position. Many companies will use a net profits interest to fund an employee royalty trust, for example.
Thank you everyone for the information.
