LLC News.  Limited liability companies or LLCs have become the entity of choice over the last 20 years and can be used for a variety of purposes from a single member real estate holding company to a multimember operating business and everything in between.  The lack of annual filing requirements, flexible taxation and ease to set up make LLCs an attractive choice for a new business.  Unfortunately, that makes them easy to forget to maintain as well.  We are often called upon to clean up outdated documents before a transaction or attempt to negotiate a solution to an issue that should have been addressed years before.  Last quarter we focused on getting your operating agreements signed.  This quarter there are few items you should be aware of that could affect your entity, including:

  1. Check the dissolution provisions of your older LLCs! Pursuant to a change in A.R. S. §29-786 starting August 9, 2017 several thousand LLCs will be administratively dissolved if their articles of organization have a dissolution date and that date has passed.  In addition, several operating agreements we have reviewed lately state that the entity dissolves upon the death of the member, the very time when we want it to continue.  Dissolution can have significant tax and legal consequences.  If you want to avoid dissolution, simply amend the Articles to elect perpetual existence or modify the Operating Agreement to allow the entity to continue upon death or disability.  Needless to say, this is a good time to check your corporate records and determine if everything is up to date.
  2. New IRS rules take affect January 1, 2018
    [1]. Prior to 2018, partnerships named a tax matters partners to represent the entity in an IRS audit and any changes flowed through to the owners’ personal tax returns and were taxed at each owner’s individual tax rate.  Starting in 2018 the tax matters partner is replaced with a “partnership representative” who has sole authority to act on behalf of the entity.  In addition, the IRS will be able to make adjustments to tax returns at the partnership level and require the entity to pay the assessment at the highest rate of tax to the current owners.  This potentially could cause owners who did not benefit from the tax return to pay the tax and/or have to pay the tax at the highest rate, rather than their personal tax rate. This change affects everyone who receives a K-1 from a partnership tax return, whether the entity is a general partnership, limited partnership or limited liability company (LLC).   Certain entities with fewer than 100 owners can opt out if the owners are individuals, estates or corporations.  The entity can also elect to push out the adjustment to its owners from the year under audit if the owners pay a slightly higher interest rate for the underpayment.  To address the potential inequities imposed by the default rules, every entity taxed as a partnership should consider amending its agreement to include provisions for (a) funding tax adjustments (ie reserves, holdbacks, clawbacks or indemnification); (b) requiring the entity to either opt out of the default rule or push out any adjustment; and (c) prohibit the transfer of interests to an owner that would prohibit the entity from opting out.  If you would like to discuss amending your agreement to address these new rules, please give us a call.
  3. The laws affecting LLCs may be changing in the next couple years. The Commission on Uniform Laws approved the Revised Uniform Limited Liability Company Act (RULLCA) in 2006 and amended it in 2011.  Since that time a subcommittee of the Arizona Bar Association has been working on modifying the new law to address issues and make it conform with Arizona law.  Quinn has been assisting with the drafting of the Arizona legislation since the fall of 2012.  The new law creates default rules for dealing with operating agreements, fiduciary duties, remedies for oppression, voting requirements, member and manager powers and derivative claims.  Some of these default rules can, and should, be modified by the terms of an operating agreement.  The new law is scheduled to be introduced the fall of 2017 and if passed, we will publish more information on what should be done.


[1] The Bipartisan Budget Act of 2015 replaced certain rules of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).