Riley Bennett Egloff Magazine January 2019 | Page 19

Should Your LLC Change Its Operating
Agreement to Address 2018 Tax Law
Changes?
Originally Published October 2018
By: Kevin N. Tharp, RBE Attorney
I
partners have left, been added, or had their percentage
interests change. To address these inequities, under the
new law, the partnership may elect to “push-out” the
partnership’s tax liability for an Adjusted Year to the
partners—including former partners who were partners
The Bipartisan Budget Act of 2015 (“BBA”) made during the Adjusted Year—who will pay their share of
significant changes to the rules governing IRS audits of the tax based on their respective percentage interests for
all business entities taxed as partnerships, effective on the Adjusted Year. LLCs that desire to “push-out” the
January 1, 2018. The effect of these changes is to make partnership’s tax liability should amend their Operating
it easier for the IRS to audit partnerships, which will Agreements to ensure that partners during an Adjusted
allow the IRS to use its existing resources to audit more Year are contractually bound to pay their share of
the additional tax, whether or not those partners are
partnerships.
currently partners, or whether their percentage interests
Certain small partnerships may elect to opt-out of the have changed in the interim.
new regime and (in so doing) decrease the likelihood
that they will be audited. To be eligible to opt-out, the In addition, an audit adjustment in prior tax years
partnership must have less than 100 partners and consist can cause accounting distortions that are unfair to the
only of “eligible partners,” i.e., individuals, estates of current partners (e.g., such adjustments can distort the
deceased partners, S corporations, C corporations, and current partners’ capital accounts). It may be desirable
foreign entities that would be treated as C corporations for an LLC taxed as a partnership to amend its Operating
under existing law. Certain types of partners will cause Agreement to authorize the Manager to make equitable
a partnership to become ineligible to opt-out, such as accounting changes to correct those distortions.
other partnerships, single-member LLCs, estates that
are not estates of a deceased partner, trusts, and any In addition, the new law requires that business
other person that holds an interest on behalf of another entities taxed as partnerships appoint a “Partnership
Representative” in place of the “Tax Matters Partner.”
person (each an “Ineligible Partner”).
Under the new law, the Partnership Representative has
We anticipate that most—if not all—of our existing more authority to take tax positions on behalf of the
LLC clients that are eligible to opt-out will want to do entity than the Tax Matters Partner did. To address this,
so, and will want to amend their Operating Agreements LLCs taxed as partnerships should consider amending
accordingly. They may also want to amend their their Operating Agreements to describe the extent
Operating Agreements to bar Ineligible Partners from of the Partnership Representative’s authority and to
provide direction to the Partnership Representative as
becoming members of their LLCs.
to the tax positions he or she should take (e.g., whether
If a partnership does not opt-out (or is ineligible to do to “opt-out” or “push-out” as described above).
so), and the partnership is audited and is required to pay
additional tax for a prior tax year (the “Adjusted Year”), If you are a member of an LLC taxed as a partnership
some partners may find themselves paying more (or less) and you have questions about how the BBA affects
than their pro-rata share of the partnership’s tax for the you and your LLC, please contact one of our business
Adjusted Year—particularly if (since the Adjusted Year) attorneys.
f your LLC has multiple members and is taxed as a
partnership, you may want to amend your LLC’s
Operating Agreement to respond to tax law changes in
effect beginning with the 2018 tax year.
RBELAW.com
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