Believe it or not, some thousands of LLCs are publicly traded partnerships (“PTPs”). On March 9, 2015, the IRS issued a statement about the status of its work on regulations affecting certain types of PTPs. The statement is quoted below. Very few LLC lawyers will ever form or work for PTPs, but all of us should at least know that they exist. Indeed, PTPs even have their own trade association. You can visit their website at http://www.naptp.org/.
Here is the recent IRS statement:
“IRS Statement on PLRs and Guidance Under 7704
We have made significant progress on our 7704 guidance project and we expect to publish proposed regulations in the near future. These proposed regulations will provide guidance on section 7704(d)(1)(E) concerning qualifying income from the exploration, development, mining and production, processing, refining, transportation, and marketing of minerals and natural resources. As has been mentioned previously by IRS and Treasury representatives, the proposed regulations will also address services provided by contractors to others in the oil and gas industry. The proposed regulations will not address other forms of qualifying income. Interested stakeholders will have an opportunity to provide comments on the proposed regulations before they are finalized and become effective. We look forward to those comments and to working with stakeholders to develop appropriate and administrable rules in this area of the law.
In the meantime, we know taxpayers have been patiently waiting for private letter rulings before proceeding with their transactions. We are pleased to report today that we are now comfortable lifting the pause in the private letter ruling process that began in 2014. During the pause, we have spent significant time studying the issues and have worked extensively with engineers in LB&I to develop workable standards to guide our ruling practice. These standards will be incorporated into the proposed regulations. P&SI is resuming the ruling process as of today, and is beginning to review the pending ruling requests, notwithstanding that we have a guidance project ongoing and that the proposed regulations, which are intended to provide greater transparency, are still being developed. We are doing so now because we recognize the importance of private letter rulings to industry participants, and we do not want to delay the availability of private letter rulings any longer where we are comfortable giving them. It may take some time to process the ruling requests as we reach out to the relevant taxpayers where additional information is needed, but we expect to work diligently to process these as promptly as we can.”
The link below provides a good brief introduction to the above provisions. The key is: You need to ask you LLC formation clients what “B&R” rights they want (or don’t want) in the governing operating agreement, and you need to do your best to include just those rights in that agreement. Passive members will often want to have expansive rights. Some managers and investment promoters will want members to have narrow rights or none at all. (However, I doubt a Delaware court would uphold a complete elimination of these rights.)
Here’s the link:
Below is the link to a fine blog post in the Delaware Commercial Litigation Blog about a recent decision in a case called Nationwide Emerging Managers, LLC v. Northpointe Holdings, LLC, No. 441, 2014 (Del. Supr., Mar. 18, 2015). The case provides, among other things, an excellent discussion of the implied contractual covenant of good faith and fair dealing, a key doctrine in negotiating and drafting LLC agreements.
Here’s the link:
Peter Mahler has deftly summarized in his latest blog post a truly horrific and still ongoing New York family business divorce. The single most important purpose of LLC operating agreements for family businesses is, to the extent humanly possible, to anticipate and prevent family feuds like this one, or, at the very least, to provide a civil means of resolving them.
Indemnification provisions are useful in many types of agreements, including operating agreements. Indeed, prospective LLC managers often insist on indemnification provisions in the operating agreements of LLCs they will manage. Below is a link to an excellent blog post by Ken Adams on the subject of indemnification provisions, plus a very good model provision.
Under the Check-the-Box Regulations, both single-member and multi-member LLCs may elect to be taxable as S corporations if they meet applicable eligibility requirements, and taxation under Subchapter S can be better for these LLCs and their members than sole proprietorship taxation or taxation under Subchapter K to reduce members’ Social Security Taxes and Medicare Taxes and for other important federal tax purposes. The latest issue of The Tax Lawyer, published by the Tax Section of the American Bar Association, contains an excellent article on Subchapter S by David R. Sicular entitled “Subchapter S at 55—Has Time Passed this Passthrough By? Maybe Not.” The cite is 68 Tax Lawyer 185 (Fall 2014).
As many of you will know, Business Law Today is a quarterly publication of the Business Law Section of the American Bar Association. It is less scholarly and formal than the ABA’s Business Lawyer, but it often publishes authoritative but practical and plain-English articles on issues of broad interest among business lawyers. The “mini-theme” of the February 2015 issue is on LLCs and other unincorporated business entities. The authors of the articles in the February issue include Bob Keatinge, Dan Kleinberger and Tom Rutledge, three of the most respected LLC scholars. Here is a link to its table of contents:
Minnesota LLC lawyers and lawyers interested in new developments in LLC statutory law may find it useful to read the above article. The cite is:
Larson and Nelson, “Minnesota’s LLC Makeover,” 72-FEB Bench & B. Minn. 20 (February 2015)
The very recent decision of the Delaware Court of Chancery in Pulieri v. Boardwalk Properties, LLC, C.A. No. 9886-CB (Del. Ch. Feb. 18, 2015) illustrates how important it is that LLCs with significant financial stakes have written (not oral) operating agreements. Click here for a cite of the case and for a transcript and excellent summary of it:
LLC statutes impose far fewer statutory formalities on LLCs than corporate statutes do on state-law business corporations. However, LLCs can nevertheless be liable for veil-piercing for failure to maintain statutory formalities. For a discussion of this issue, click here: http://www.nybusinessdivorce.com/2015/03/articles/llcs/llc-formalities-that-matter-guest-post-by-professor-daniel-kleinberger/#more-13264.