STRUCTURING BUSINESS OPERATIONS BETWEEN SPOUSES

Practical Tax Strategies, an excellent tax journal, has just published a very useful article about how to structure business operations between spouses.  The title of the article and its first couple of paragraphs are below:

March, 2019
Business Operations Between Spouses
Copyright (c) 2019 RIA
James R. Hamill
BUSINESS OPERATIONS BETWEEN SPOUSES: PARTNERSHIP FILING OR DISREGARDED ENTITY?

The tax law provides both a statutory and an administrative exception to the requirement to file a partnership return where spouses are the only owners of the business.

*9 Section 6031 requires a partnership to file an annual information return to its members. When spouses operate a business together as the only owners of that business, there would not appear to be a need for a partnership tax filing as an information source because all income or loss is to be reported on the same tax return by way of a joint filing.

The tax law provides both a statutory and an administrative exception to the requirement to file a partnership return where spouses are the only owners of the business. The statutory exception applies only to joint ventures (but not a separate entity) between spouses and also requires that each spouse materially participate in the business of the joint venture and that both spouses elect disregarded entity (DE) treatment. Where spouses are the only owners of an unincorporated business entity and hold their interests as community property under state law, they may choose between partnership or DE status. The community property exception does not require that the operations rise to the level of a trade or business or that either spouse materially participate in the operations. It also applies if the spouses establish a separate entity such as a limited liability company (LLC).

SERIES LLCS UNDER ARIZONA’S NEW LLC ACT

LLC lawyers who use or may consider using series LLCs for their clients may find interest in the new law journal article cited below:

55-MAR Ariz. Att’y 30
Arizona Attorney
March, 2019
Arizona’s New Limited Liability Company Act
Kevin G. Hunter Andy G. Anderson
Copyright © 2019 by the State Bar of Arizona; Kevin G. Hunter, Andy G. Anderson

MODEL LLC AGREEMENT

In connection with a February seminar on real estate transactions, the American Law Institute has published a very good model LLC agreement.  Among its other virtues, the tables of contents of the agreement provide an excellent checklist of the issues that LLC lawyers should consider addressing in LLC agreements they are planning and drafting for their clients.  The title page and tables of contents of the ALI agreement are below:

SA004 ALI-CLE 175
The American Law Institute Continuing Legal Education
ALI-CLE Course Materials
February 6 – 8, 2019
Modern Real Estate Transactions 2019
LIMITED LIABILITY COMPANY AGREEMENT
David Barksdale
Loeb & Loeb LLP
Los Angeles, California
Copyright (c) 2019 The American Law Institute; David Barksdale

LIMITED LIABILITY COMPANY AGREEMENT

OF

____________________,

a Delaware limited liability company

Dated as of _______________

TABLE OF CONTENTS

ARTICLE I DEFINITIONS

1.1 Definitions

1.2 Construction; Incorporation of Recitals

1.3 Interpretation

ARTICLE II GENERAL PROVISIONS

2.1 Formation of Company

2.2 Term

2.3 Purpose

2.4 Place of Business; Registered Office and Agent

2.5 Nature of Members’ Interests

2.6 Title to Company Property

2.7 Intentionally Omitted

2.8 Developer Member Representations and Warranties

2.9 Investor Member Representations and Warranties

2.10 Developer Investment Document [and Investor Sponsor Guaranty Obligations]

2.11 Transfer of Development Approvals

2.12 Initial Funding Conditions

2.13 Closing Costs

2.14 Indemnity by Developer Member

2.15 Verification

2.16 Subsidiaries

ARTICLE III CAPITAL CONTRIBUTIONS; LOANS

3.1 Capital Accounts

3.2 Pre-Development Contributions; Acquisition Capital Contributions

3.3 Additional Capital Contributions Upon Commencement of Operations

3.4 Failure to Make a Pre-Development Contribution or any Additional Capital Contribution

3.5 Construction Capital Contributions; Investor Member Construction Priority Capital Contributions

3.6 Conditions to Closing under Purchase Agreement and Commencement of the Project Work

3.7 Intentionally Omitted

3.8 Publicity

3.9 Intentionally Omitted

3.10 Intentionally Omitted

3.11 [Financing Options; Financing Termination Option

3.12 Termination Option

ARTICLE IV MANAGEMENT OF THE COMPANY

4.1 General

4.2 Major Decisions

4.3 Duties and Responsibilities of the Managing Member

4.4 Rights Not Assignable, etc

4.5 Development Agreement, Property Management and Leasing Agreement

4.6 Concerning Investor Member

4.7 Authority

4.8 Designated Representatives

4.9 Leases and Compliance with Leases

4.10 Environmental Responsibility

4.11 SPE Covenant

4.12 Third Party Financing

4.13 Guaranties

4.14 Assignment of Purchase Agreement

ARTICLE V DISTRIBUTIONS AND ALLOCATIONS

5.1 Distributions of Net Cash Flow and Net Capital Proceeds

5.2 [Tax Advances

5.3 Net Income and Net Loss

5.4 Regulatory Allocations

5.5 Intentionally Omitted

5.6 Allocations in Connection with the Liquidation of the Company

5.7 Tax Allocations; Section 704(c)

ARTICLE VI BOOKS AND RECORDS; TAX MATTERS

6.1 Accounting

6.2 Company Funds

6.3 Statements and Budgets

6.4 Inspection

6.5 Tax Matters

6.6 Tax Matters Representative

6.7 Noncompliance

6.8 Appraisals

6.9 Tax Service

6.10 Legal Fees

6.11 Developer Member and Affiliate Expenses

6.12 Credit Reports and Other Information

ARTICLE VII TRANSFER OF COMPANY INTERESTS; WITHDRAWAL OF MEMBERS

7.1 Transfer of Developer Member’s Interest

7.2 Transfer of Investor Member’s Interest

7.3 Bankruptcy

7.4 Waivers

7.5 Expenses

7.6 Withdrawal of Members

7.7 Compliance with Loan Documents

ARTICLE VIII SALE OF PROPERTY; DEADLOCK; BUY/SELL OFFER

8.1 Limitations on Exercise

8.2 Buy/Sell Offer

8.3 Additional Limitations on Exercise

8.4 Closing of Buy/Sell Offer

8.5 Investor Member Right to Initiate a IM Forced Sale Right

8.6 Investor Member Forced Sale Right

8.7 Closing of IM Forced Sale

8.8 DM Put Option

8.9 Reciprocal Put Option

8.10 Closing of Reciprocal Put Option

ARTICLE IX INSURANCE

9.1 Coverage

9.2 Insurance During Any Period of Construction, Repair, Restoration or Replacement

9.3 Evidence of Insurance; Notices

9.4 Concerning Liability Insurance

9.5 Miscellaneous Insurance Matters

9.6 Insurers

9.7 Contravention of Insurance

9.8 Waiver of Subrogation

9.9 Coordination with Loan Requirements

ARTICLE X DISSOLUTION AND TERMINATION

10.1 Dissolution

10.2 Appointment of Liquidating Member

10.3 Distributions and Other Matters

10.4 Distributions of Property

10.5 Actions of the Liquidating Member; Statements of Account; Certificates of Cancellation

ARTICLE XI DEFAULT

11.1 Defaults and Remedies

11.2 Removal of Developer Member as Managing Member

ARTICLE XII [INTENTIONALLY OMITTED]

ARTICLE XIII NOTICES

13.1 Notices

13.2 Change of Address

ARTICLE XIV MISCELLANEOUS

14.1 Indemnification

14.2 Intentionally Omitted

14.3 Estoppel Certificates

14.4 Remedies

14.5 Partial Invalidity

14.6 Governing Law; Successors

14.7 Amendment

14.8 Execution in Counterparts

14.9 Computation of Time

14.10 Titles and Captions

14.11 Independent Ventures

14.12 Employees

14.13 Intentionally Omitted

14.14 Prohibited Payments

14.15 Entire Agreement

14.16 Demands, Capital Calls, Notices, Consents and Approvals

14.17 Meetings

14.18 Preamble

14.19 No Brokers

14.20 Waiver Of Jury Trial

14.21 Attorneys’ Fees/Prevailing Party

14.22 Waiver of Partition

14.23 Limited Liability

14.24 Confidentiality

INDEX TO ADDENDA

Addendum A: Construction Capital Funding Addendum

INDEX TO EXHIBITS

Exhibit A: Form of Assignment and Assumption Agreement

Exhibit B: Schedule of Pre-Development Contribution Amounts and Maximum Capital Contributions

Exhibit C: Schedule of Environmental Audits

Exhibit D: Legal Description of Land

Exhibit E: Initial Leasing Guidelines

Exhibit F: Schedule of Permitted Encumbrances

Exhibit G: Pre-Development Budget

Exhibit H: Preliminary Project Budget

Exhibit I: Preliminary Project Plans and Specifications

Exhibit J: Developer Member Organizational Chart

Exhibit K: Other Personal Property

Exhibit L: Example of Dilution Calculation

Exhibit M: Preliminary Financing Guidelines

Exhibit N: Sample Calculation of Investor Return Multiple

Exhibit O: Reporting Requirement

Exhibit P: Sample Calculation of Straight Split

Exhibit Q: Straight Split Modifications

Exhibit R: CI Modifications

Exhibit S: Project Costs Incurred

Exhibit T: Development Approvals

Exhibit U: Design Professionals Fees

Exhibit V: Pre-Development Requisition Forms

Exhibit W: Construction Requisition Forms

Exhibit X: Final Lien Waivers

SECTION 199A SLIDE PRESENTATION

The Joint Committee on Taxation has released a slide show about section 199A.  I have not yet had time to review any of the 27 slides included in the show, and to my knowledge, the JCT has not yet released a link for the show; I know about it through the March 15th edition of the CCH daily tax information service.  However, it is clear that every lawyer, accountant and other professional who advises clients under section 199A must be familiar with these 27 slides.

SECTION 199A

For subscribers to Tax Notes who are interested in section 199A, the article cited below will be of interest.

Here’s the cite:

What’s Next for the Passthrough Deduction

Posted on Feb. 19, 2019

By: Marie Sapirie

A recent set of final and proposed rules and other guidance significantly advanced the implementation of the 20 percent deduction for the qualified business income (QBI) of passthrough entities and the 20 percent deduction for qualified real estate investment trust dividends, but some questions remain for Treasury and the IRS to resolve.

MY ARTICLE IN TAX NOTES ON HOW TO COMPUTE SECTION 199A PASS-THROUGH DEDUCTIONS

I published the article linked below in Tax Notes, a leading federal tax daily information service, on about February 8, 2019, and, as permitted by Tax Notes, I am publishing it today in this post.  The article seeks to provide clear, practical and comprehensive guidelines for computing pass-through deductions for all of the seven categories of taxpayers who are eligible for them.  The discussion in the article concerning a particularly aggressive method of computation that arguably may be used by Category 4 taxpayers is controversial, but Section 199A experts should be aware of it.

https://llc199a.com/wp-content/uploads/Cunningham-Final-2.2-2-4-19.pdf

ADDRESSING BANKRUPTCY IN OPERATING AGREEMENTS

Below are the citation and first couple of sentences of an article about addressing possible bankruptcies in LLC operating agreements.  Every LLC lawyer should be familiar with the key points in the article.

Here are the cite and sentences:

2018-JAN Bus. L. Today 1
Business Law Today
January, 2018
Brett S. Theisen
Copyright © 2018 by the American Bar Association; Brett S. Theisen
PUBLIC POLICY PROHIBITS CONTRACTUAL RESTRICTIONS ON AN LLC’S RIGHT TO FILE BANKRUPTCY

IN BRIEF

  • Enforceability of bankruptcy restrictions is a matter of federal law.
  • In Lexington Hospitality, the LLC’s original operating agreement contained no limitations on its manager’s and/or members’ ability to file bankruptcy on the LLC’s behalf.
  • Parties to an operating agreement generally have the freedom to contract limited only by the parameters in the relevant articles of organization and statutory law.