Amending governing agreements for multi-member limited liability companies, partnerships and other so-called pass through entities taxed as partnerships (“entity”) is now highly advisable for tax years commencing after December 31, 2017. For the commonly used limited liability company (“LLC”), this governing agreement is usually called an Operating Agreement.
The need for amendment is because the law has changed and the Internal Revenue Service (“IRS”) can now impose liability for audit adjustments and assessments on the entity as opposed to individual owners. Consequently, an owner may be liable for an assessment in an audit year in which it was not an owner of the entity. However, such pass through entities can avoid this rule and impose any liability onto owners who were actually owners during the audit year in question. To do this, the governing agreement can and should be amended.
Further, there is no longer a “tax matters partner” under the new law. Instead, the rules provide for the naming of a “partnership representative.” The law affords the partnership representative much greater power than it did to the old tax matters partner. If the entity fails to name a partnership representative, the IRS has the power to deem an interested party the representative. Amendment(s) should be made to ensure there is a partnership representative of the entity’s choosing and there are mutual obligations of full communication between and among the partnership representative and owners, especially in the case of an audit.
If you have any questions about this topic and how it may impact your business, please contact your Weston Hurd attorney.