The article under the link below is about whether a single-member LLC’s federal tax classification as a disregarded entity should be a factor in veil-piercing. The author of the article, Tom Rutledge, is a top LLC practitioner and scholar.
The best federal income tax regimen for many LLCs whose members want to avoid Social Security Taxes is Subchapter S. In these LLCs, the members are, for federal income tax purposes, both shareholders and employees. The LLC can deduct their compensation as employees as a business expense only to the extent that this compensation is reasonable. Below is a link to a recent and useful blog post about what constitutes reasonable—and thus deductible—compensation to an employee of a business corporation who was also its sole shareholder under a recent Tax Court case. The principles underlying the post and the case it discusses apply also to members who are employees of LLCs taxable as S corporations.
Here is the link:
The dispute resolution provisions in an LLC operating agreement are always among its most important provisions. The choice is usually among mediation, arbitration and litigation. In states with excellent business courts—e.g., Delaware and New Hampshire—litigation can be the best choice. In most, arbitration is better. But in my view, operating agreements should require the parties to mediate before they arbitrate or litigate.
Here is an excellent bog post about how mediation works and why it is often the best dispute resolution option:
The dispute resolution provisions of LLC operating agreements are always among the most important provisions in these agreements. The choices are usually among mediation, arbitration and litigation in court. There is now a new, expedited and expert arbitration process in the Delaware Supreme Court. I’m considering recommending it to a large LLC client of mine. Perhaps you should consider it for one or more of your larger clients. Here is the link to a recent blog post about Delaware Supreme Court arbitration:
The issue of oppression of minority members of an LLC by the majority members is a key issue in planning and negotiating LLC deals, drafting operating agreements in these deals, and operating LLCs. Peter Mahler’s latest blog post addresses this issue in the context of a New York closely held corporation, but what he says applies equally to LLCs in every jurisdiction. Here’s the link:
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.”
PROVISIONS IN LLC OPERATING AGREEMENTS EXPANDING OR RESTRICTING THE RIGHT OF MEMBERS TO INSPECT LLC BOOKS AND RECORDS (“B & R” PROVISIONS)
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.