I will be teaching a 1.5-hour seminar on the above subjects on December 11. If these subjects interest you and you want more information about my seminar, click on this link: http://www.nbi-sems.com/Details.aspx/R-68133ER%7C?ctname=SPKEM.
Obviously, LLC operating agreements should be well drafted in plain English that clients can readily understand. The best website I know of on contract drafting is written by a lawyer named Ken Adams. The URL is www.adamsdrafting.com. (If you know of other good websites on contract drafting, please so indicate in a response to this post.) Ken is the author of the ABA handbook on contract drafting, and he teaches contract drafting seminars to law firms worldwide. If contract drafting is a subject that interests you, I suggest you click on the link to his website and then on the navigation button marked blog. This will enable you to subscribe to his website blog posts.
About 70 percent of all LLCs are single-member LLCs owned by individual. About 25 percent are two-member LLCs. Only about 5% of all LLCs have three or more members.
The biggest risk for two-member LLCs are (i) deadlock between the members and (ii) serious misconduct by one of the members. The latter risk is addressed in this terrific recent blog post by Peter Mahler.
When you form two-member LLCs for your clients, you’ve got to address the above two risks forcefully in your clients’ operating agreements. Failure to do so would be a clear violation of the duty of competence under Rule 1.1 of the ABA Model Code of Professional Conduct as in effect in most states, and could lead to a well-deserved malpractice claim.
In case this is useful to those of you who form or are interested in forming series LLCs: My Wolters Kluwer LLC book contains a lengthy chapter on the blessings and curses of series LLCs (with particular focus on Delaware series LLC law), a model Delaware series LLC certificate of formation and a model Delaware series LLC operating agreement with section-by-section comments.
Whenever you help a client form an LLC, you have to discuss with the client the Social Security Tax implications of the formation. Hence the importance of the note below from yesterday’s CCH Intelliconnect Tracker News:
The Social Security Administration (SSA) has announced that the maximum amount of earnings subject to OASDI Social Security tax will be $118,500 for 2015, up from $117,000 for 2014. The $1,500 increase reflects an overall rise in average total wages. Of the estimated 168 million workers who will pay Social Security taxes in 2015, about 10 million will pay higher taxes because of the increase in the taxable maximum, SSA reported.
The LLCs, Partnerships and Unincorporated Entities Committee of the ABA Business Section put together the third annual ABA Business Law Section LLC Institute, and the institute was held in Arlington, VA on October 16-17. The Institute was a great success. Click here for a list of Institute presentation topics and materials. This list will give you a pretty decent idea of what’s hot these days in the LLC world. I was unable to attend the Institute this year, but when I get a chance, I intend to read all of the Institute materials.
If you want to develop or improve your LLC practice, you’ve got to join the LPUE committee.
For those of you who form LLCs taxable as partnerships or have clients that are members of LLCs taxable as partnerships, here is a significant news item from the latest Tax Notes:
IRS Proposed Regs Address Distributions Treated as Sales or Exchanges
The IRS has issued proposed regulations on how a partner should measure its interest in a partnership’s unrealized receivables and inventory items and on the tax consequences of a distribution that causes a reduction in that interest. (REG-151416-06)
Whenever you form a multi-member LLC taxable as a partnership, protecting members from the Self-Employment Tax may be a critical here. Click here for an excellent discussion of this issue and of the usefulness of Internal Revenue Service Prop. Reg. § 1.1402(a)-2 in addressing it.
However, I am more confident than the author of the discussion with respect to the question whether you can rely on the Prop. Reg. to avoid Self-Employment Tax.
In case it’s of interest to you, here is a link to an excellent current follow-up article, by a first-rate financial writer named Jason Van Steenwky, to the article I posted here yesterday about the tax risks of flipping real estate.
Perhaps as many as a fourth of all LLCs are used primarily to invest in or to buy and sell real estate. A basic issue for the members of all of these LLCs is whether, through their LLCs, they are acting as real estate investors or as real estate brokers. In case it’s relevant in your practice, here is a brief, practical online article on this subject that seems to me to be generally accurate.