Even if you’re unlikely to ever have any involvement with an LLC whose interests are publicly traded, you should have at least a basic understanding about them and the tax rules that govern publicly traded LLCs taxable as partnerships. Here is a good, brief article about pending U.S. Treasury regulations governing publicly traded partnerships:
The capital account provisions in the operating agreements of LLCs taxable as partnerships are critical both in defining the economic deal among the members and in defending this deal if challenged by the IRS upon audit. Donald J. Weidner, Dean and Alumni Centennial Professor, Florida State University College of Law, has just published an article in Florida State U. Business. Rev. 1 (Spring 2014), entitled CAPITAL ACCOUNTS IN LLCs AND IN PARTNERSHIPS: POWERFUL DEFAULT RULES AND POTENTIAL TAX SIGNIFICANCE. It’s an excellent article; I recommend it for anyone who wants to expand their understanding of capital accounts. Part VI of the article, entitled “Conclusion,” provides a succinct summary of the article’s content. Here is that conclusion:
In the financial crisis that started to unfold in 2007, it became widely known that investment bankers, and their lawyers and accountants, had drafted documents for financial instruments so complex as to be beyond comprehension. However impenetrable, language and structures migrated and became widely accepted once they passed muster. Former Federal Reserve Chairman Allan Greenspan quipped that, even with more than 100 economists at his disposal, he could not *29 untangle the agreements or structures behind billions of dollars of collateralized debt obligations. Unfortunately, something similar, although perhaps not quite as extreme, has happened within the more modest arena of LLCs and partnerships. Despite the fact that these are two premier vehicles for small businesses with two or more owners, they are often governed by agreements that are very difficult to understand. Operating and partnership agreements are often drafted by generalists who incorporate standard form language that attempts to validate special allocations of tax benefits that might be made, even if implausible. Although the relevant federal income tax regulations focus heavily on capital accounts, those capital accounts are often misunderstood and can have significant and unintended economic consequences.
My thesis is twofold. First, even apart from federal income tax law, attorneys must have at least a rudimentary understanding of what capital accounts are and are not, as well as any state default rules regulating them. The accounting profession typically is generating individual capital accounts for each owner, even if those accounts are not required either by the owners’ agreement or by law. In the world of small business, often characterized by incomplete or vague agreements and by poor record-keeping, those accounts provide at least some standardized measure of an owner’s net equity in the firm. Second, capital account analysis is a useful analytical device. Walking the standard range of anticipated transactions through a capital accounts analysis can raise with great clarity and precision basic economic decisions that might otherwise be overlooked, particularly decisions regarding the sharing of different kinds of losses among the owners.
As most of you will know, the U.S. Treasury Department Check-the-Box Regulations are the core document in the field of the federal income taxation of LLCs and their members. I recently taught a three-CLE-credit seminar on these regs for New Hampshire accountants, and I distributed to them an extensive seminar outline. The outline is too data-rich to send in this e-mail, but if you’d like to look at it, you can do so by clicking on the hyperlink “here” at the end of the fourth paragraph of Section I of a LLC seminars website I maintain. Here’s the link to the website: http://www.cunninghamllcseminars.com/.
The brief article quoted below has nothing to do with LLCs, but it does provide an interesting overview of the legal travails of Uber, the “Britney Spears” of the blogosphere.
Uber Is the New Britney Spears
In connection with my LLC formation practice, I sometimes have to provide clients with advice and documents that will protect them from liability under federal and state securities laws if these clients want to grant LLC memberships to passive investors. (Any such grant can raise serious securities law issues.)
Thus, to keep up in the field of securities law rules governing “private placements” (i.e., investments in non-public entities), I subscribe to the blog of an organization called Venture Capital Experts. A very recent blog post in that blog contains an article arguing, among other things, that securities laws should be amended to make it easier for members of the middle class to make capital investments in venture capital-funded enterprises. The article is relevant to LLC lawyers who handle private placements of LLC membership rights or who want to learn to handle them. However, it is perhaps of even greater interest to estate planners who have clients potentially interested in making at least modest venture capital investments.
Here’s the link to the above article:
If you’re an LLC lawyer, this probably means you’re a lawyer for, among other types of clients, clients who are starting new businesses. Some of these clients may want to seek venture capital investment for their businesses. The brief article under the link below provides seven tips for these start-ups. Based on my experience, I think it’s a great article.
Here’s the link:
Buy-out provisions in the operating agreements of family-owned LLCs are often among the most important provisions in these agreements. The blog post under the link below, from a blog known as “Lexology,” provides some useful guidance in planning and drafting these provisions.
Here’s the link:
Peter Mahler’s blog post under the link below deals with valuation dates in court-ordered buy-outs, but many of the principles in the post apply to buy-out provisions in LLC operating agreements.
Here’s the link: http://www.nybusinessdivorce.com/2015/06/articles/llcs/court-ordered-llc-buy-outs-whats-the-valuation-date/
Your client has never formed an LLC or any other business entity and asks you for guidelines in choosing a good name for the LLC you’re forming for her. I think you should tell her four things. Can any readers of this post think of anything else to tell her?
- Give your LLC the best possible name from a marketing viewpoint.
- Check the website of the Secretary of State or other relevant state officer in your state to make sure the name you want is not already taken in your state (and if it’s not, think about protecting it by reserving it or registering it with that officer as a trade name if you haven’t formed your LLC quite yet).
- Make sure that no other business is using the name you want and that this name is available as a domain name. A simple Google search should suffice to handle these tasks.
- If you plan to use the name as a federal trademark or service mark, check online with the United States Patent and Trademark Office to make sure the mark you want isn’t already taken. The link is http://www.uspto.gov/trademark.
- If the LLC is being created for asset protection purposes, then consider a name that has no connection to business, personally or any other way that might link it to the owners.