Greenspoon Marder International Wealth & Asset Planning Blog: Essential Update to Partnership Agreements, Multi-Member Limited Liability Company Operating Agreements and More

International Wealth & Asset Planning Blog Mar 5, 2021 Denver, CO

The Bipartisan Budget Act of 2015 (later amended by the Protecting Americans from Tax Hikes Act of 2015) substantially changed the rules governing IRS audits of partnerships (including limited liability companies taxed as partnerships). These rules became applicable to partnership tax returns filed for tax years beginning after December 31, 2017.

Although the vast majority of partnerships are affected, the new rules were primarily designed to make it easier for the IRS to assess and collect tax on large partnerships (i.e., partnerships with more than 100 partners) by shifting the tax liability for partnership audits from the partners to the partnership. A partnership with 100 or fewer partners may elect out of the new regime, unless one or more of the partners is a partnership or trust. Most partnerships (and limited liability companies taxed as partnerships) need to amend the audit provisions set forth in their current partnership agreements (or operating agreements) to ensure that such agreements account for the procedural requirements under the current audit regime.

Additionally, the new law replaced the prior concept of a Tax Matters Partner (“TMP”) with a “Partnership Representative.” Because the authority of a Partnership Representative goes far beyond that of a TMP, partnerships (again including limited liability companies taxed as partnerships) need to consider how this change should be reflected in the partnership agreement (or operating agreement, as the case may be); specifically, by having the agreement address the Partnership Representative’s status, authority, and the limitations imposed on the exercise of said authority.

For this purpose, a partnership agreement (or operating agreement) should now include provisions:

requiring that some percentage of the partners agree to certain actions taken by the Partnership Representative;
delineating how a Partnership Representative is to be elected and removed, and how a successor Partnership Representative is to be appointed; and
imposing some level of duty on the Partnership Representative to make an unbiased decision, or at least provide for the possible appointment of a successor Partnership Representative if it appears that there is a conflict of interest.

A Partnership Representative can be any U.S. person or entity. If a partnership does not name a Partnership Representative, the IRS has the power to name one for the partnership. These changes enable the IRS to audit additional partnerships each year, thereby increasing the audit risk associated with partnerships.

In order to address these changes and the numerous complicated elections and exceptions provided under the new law, every partnership agreement, multi-member limited liability company operating agreement, etc., must be amended. If an agreement is not amended to address these changes, the partnership may neglect to take advantage of potentially beneficial elections under this law and may shift the tax burden of an audit to current partners even if such partners were not partners in the year under audit. If you have not already amended your agreements, please contact us at your convenience.

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Greenspoon Marder is a national full-service business law firm with over 200 attorneys and offices across the United States. We are ranked among American Lawyer’s Am Law 200, as one of the top law firms in the U.S. since 2015. Our firm was founded with the goal of providing the highest quality legal services at the highest value for our clients. Each of our clients is unique and so are their legal needs. We believe no one size fits all for professional services. Our lawyers offer flexible and creative solutions to meet our clients’ respective needs. Our mission is to understand the challenges our clients face, build collaborative relationships and craft solutions with a focus on strategic goals.

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This Greenspoon Marder LLP Client Alert is issued for informational purposes only and is not intended to be construed or used as general legal advice nor a solicitation of any type. Please contact the author(s) or your Greenspoon Marder LLP contact if you have any questions regarding the currency of this information. The hiring of a lawyer is an important decision. Before you decide, ask for written information about the lawyer’s legal qualifications and experience.

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