LLC/Partnership Formation Key Issues: Distribution Rights, Capital Contributions, Income and Loss Allocations

Initial partnership considerations go beyond registering the name, applying for identification numbers, and preparing the Articles of Organization. Key to the formation is a partnership agreement that spells out how day-to-day and sticky aspects of running a business are handled.

Flexibility is a primary reason businesses select to operate as a partnership or LLC. Flexible allocations, however, must comply with the provisions of Section 704(b) and have substantial economic effect. Significant flexibility is allowed when initially funding the partnership. One partner can contribute property while the other contributes services. Issues arise with both. One partner could contribute property with a fair market value that is higher or lower than what he or she paid for it. The services partner may not be initially admitted to the partnership and his or her contribution will likely generate taxable income.

In addition to the known considerations, other key considerations are often overlooked. Transferring ownership and whether this right is unrestricted, payouts on dissolution of the partnership, and the level at which capital accounts are required to be maintained should all be addressed at formation. The BBA centralized partnership audit regime has escalated the importance of naming a partnership's representative and having predetermined procedures for handling prior period audit adjustments. Tax practitioners working with partnerships and LLCs need to be able to guide partners and members appropriately when they are establishing partnerships and LLCs.

Listen as our panel of pass-through entity experts provides a checklist of items to consider when forming an LLC or partnership.

1. Partnership agreement
2. Capital contributions
3. Distribution rights
4. Profit and loss allocations
5. Retirement
6. Dissolution considerations
7. BBA centralized audit regime
   1. Partnership representative
   2. Audit adjustments
8. Other considerations

The panel will consider these and other critical issues:

• Procedures for adding and terminating partners
• When noncompete agreements should be considered
• Complications brought about by the BBA centralized audit regime
• Partner retirement and partnership dissolution issues that partners should address initially
• Allocation methods for payouts and distributions

Learning Objectives

After completing this course, you will be able to:

• Identify specific BBA provisions that need to be addressed initially by partnerships
• Determine when capital contributions create outside basis
• Decide how to head off future partner or member disputes with proper structuring and planning
• Ascertain when noncompete agreements should be considered by partnerships

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of estate, gift and trust taxation including various trusts types, the unified credit, and portability.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).