Partnerships & LLC's by Carolyn Flaherty

I enjoy working with partnership and LLC entities because, although the IRS requirements I must affect are complicated, the end result is intended to be one of common sense. This result is to me a pleasant & refreshing rarity in the Internal Revenue Code. Whenever I get stuck trying to unravel the applicable tax codes; I always return to the partnership/LLC agreement for guidance and then ask myself, would this calculation make economic sense?

Taxation of pass-through entities is a unique area of taxation. Determining the amount of taxable income at the partnership or LLC level is done in a similar manner as for any other business organization. However, once taxable income is established, there is another more complex computation that must be performed: the allocation of income, gains, losses and the determination of distributions to the underlying partners/members.

IRS guidelines and terminology surrounding allocations is complicated and technical. However, the intended end result is to ascertain the intention of the members and enforce this intention in a way that achieves the economic reality of the deal.

When it comes to partnerships and limited liability companies, the agreement is the law. My job is to gain an understanding of the agreement and apply this understanding without exception. As an avid reader with an analytical mind, I enjoy reviewing and interpreting the agreements and making sure the members have an understanding of any conflicts or potential pitfalls in their agreement. Many times what is in the written agreement does not reflect the expectations of the members, at which point I am able to show them why and help them revise the agreement accordingly.

Of course, it is inevitable that because the road through the Internal Revenue Code is a convoluted path to common sense, I find myself attempting to explain the results of a partner/member’s allocation in layman’s terms. Although this can be difficult to clarify in a non-technical manner, I have to admit that the “ah ha” moment when a client sees the reason and benefit of the transaction’s form is extremely satisfying for me.

I am a fervent proponent of the limited liability company as a business model for several reasons. Limited liability companies avoid the double taxation inherent in regular corporate entities, they afford legal liability for the members (typically owners will not be personally liable for business debts of the company and therefore creditors of the company can not peruse personal assets for business debts), and they offer amazing flexibility in how members share in the economics of the deal and manage their business.

Of course, there are many considerations when choosing how to organize your business. You should always consult an attorney as well as a Certified Public Accountant when choosing your entity type so they may weigh the tax impact, your personal goals and the legal implications of the deal. I also advise that if you choose to organize your business as a partnership or limited liability company you carefully review and understand your agreement and it’s implications before signing.