In this part of the Partners in Peril program, Mr. Tufts looks to come to the specific aid of those partners, members, or shareholders in the closely-held setting who find themselves unclear or unsure of their duties and obligations appearing in their partnership agreement, operating agreement, or shareholders agreement, including how it may also pertain to disputes that may then arise with regard to erroneous K-1s. When providing services as part of this program, Mr. Tufts offers owners of pass-through entities unique insights on the law of closely-held entities here in Florida. Mr. Tufts has spoken for years about LLCs, LLPs, and LLLPs, first as these entities developed in North Carolina in the 90s where he then practiced law, and over the past two decades, here in Florida.
Mr. Tufts was honored to serve on the estate planning subcommittee to the Florida Bar RE-FRULPA task force, which was responsible for analyzing the NCCUSL version of the revised uniform limited partnership act and addressing how that uniform law might compare with prior state law and the laws of other states. The work of that task force led to the implementation of a new statute governing Florida limited partnerships and limited liability limited partnerships (LLLPs), which was enacted into law as Florida’s Revised Uniform Limited Partnership Act of 2005, effective January 1, 2006 (Chapter 620, Part I, Sections 620.1101 through 620.2205).
Years later, Florida enacted the Revised Limited Liability Company Act (Chapter 605 of the Florida Statutes).
When factoring in Florida’s Revised Uniform Partnership Act of 1995 (Chapter 620, Part II, Sections 620.81001 through 620.9902), it becomes apparent that there are three different statutes governing the three entity types, each with its own style and theories. Yet, all three entity types may be “partnerships” under the Federal tax law. Owners may find it a bit maddening trying to figure out their respective rights and obligations, first, under state law, and second, under the Federal tax law. These two sets of laws may not always be in alignment.
Thus, “partnership” agreements (partnership agreements, operating agreements, or other similar such agreements), when drafted for entities intending to be “partnerships” under the Federal tax law must be further mindful of the Bipartisan Budget Act of 2015 (BBA), which, inter alia, replaced TEFRA with a centralized audit regime. Agreements that previously relied on the concept of a tax matters partner (member) or TMP must be revised to reflect on the “partnership representative” and the other aspects of the BBA. Knowing what entities are covered by the BBA or which ones can elect out of the BBA and which ones cannot, is also critical. Practitioners are surprised to find that when the BBA applies, an audit of any “partnership” by the IRS can result in an imputed underpayment that will create an entity-level tax, that may or may not be pushed on out to the “partners.”
For LLC entities wishing to make “S corporation” elections and thus NOT be treated as “partnerships” under the Federal tax law, there is the importance of drafting provisions that align not with the Treasury Regulations on capital account maintenance and partnerships (Section 704(b) of the Internal Revenue Code), but rather, S corporation provisions that require, inter alia, pro rata allocations and single class of stock. At the same time, there is the need to restrict against transfers of stock to ineligible shareholders such as partnerships (inclusive of LLCs taxed as partnerships under the Federal tax law) and non-resident aliens or non-citizens. Careful regard should be given further to the possibility of parties looking to achieve a 1377 election for mid-year purchases of interests.
In all of these situations, there is the need to consider how to draft specific provisions that govern the sharing of entity-level financial accounting and tax information that assist in the determination of pass-through items on the Schedule K-1. These owners are often interested in making requests for information particular to the details that go into the Schedule K-1, allocations, etc., and the timeliness of the same. Requests for documentation that corroborate a K-1 are often made, and the provisions in these agreements governing the same, and applicable state law will require careful consideration. Separate from this are those former owners on the outside looking in who may later desire to obtain copies of the underlying entity-level corporate returns (e.g., Forms 1120-S or 1065). Forms 4506 are used for this purpose.
No matter what entity type is involved, Mr. Tufts is able to provide you with a preliminary assessment of your operating agreements, partnership agreements, and other organizational and formation documents, using our years of experience and knowledge of the inner workings of the various statutes and trends in the law.
If you are an owner or member or shareholder and are interested in a preliminary assessment being done of your formation or organizational documents, please contact us.