Back to News

LLC Operating Agreement Tax Trap; IRS Ruling

Published on

January 4, 2023

In November 2022, the IRS issued a Private Letter Ruling which confirmed that Subchapter S status was terminated because the LLC operating agreement contained Section 704 partnership tax provisions governing distributions and capital account maintenance.  These provisions in the operating agreement provided for disproportionate distributions which resulted in a termination of Sub S status; even if disproportionate distributions were never made.

In a previous tax alert, we noted that business owners should discuss entity selection with their CPA and attorney and select the best of potentially three available tax elections for an LLC.  Unlike a corporation’s shareholder’s agreement, an LLC operating agreement must be carefully drafted to include appropriate provisions matching the tax status elected by the LLC.  There are multiple tax differences between an LLC being taxed as a partnership and an LLC taxed as an S Corporation.

Termination of Sub S status can result in double taxation and the assessment of additional self-employment and other taxes. The tax provisions of an operating agreement should be carefully considered at the time of formation of the LLC and also later when a change in tax classification status is being considered.

If you have any questions about the latest Private Letter Ruling, please contact David Rattigan, Charmaine Nyman, Alexandra Otto or anyone in the Business Practice Group.


Related News

View More News
Press Release
November 27, 2023

Barley Snyder Adds Attorney Raymond A. Durkin, Jr. to Lancaster Office

For Immediate Release Lancaster, Pa. – Barley Snyder is pleased to announ...

Learn More
Press Release
November 21, 2023

Barley Snyder Attorney Amanda Kowalski Elected Vice President of the Lancaster Law Foundation

For Immediate Release Lancaster, Pa. – Barley Snyder is pleased to announ...

Learn More
Press Release
November 16, 2023

Barley Snyder Completes Malvern Office Renovations

For Immediate Release Malvern, Pa. – Barley Snyder is pleased to announce...

Learn More

Other Upcoming Events

View All Upcoming Events
Dec
07
3:30 pm
-
6:00 pm
event
Location

Barley Snyder’s Reading Open House!

Learn More
Dec
12
4:30 pm
-
6:30 pm
event
Location

Barley Snyder’s Gettysburg Open House!

Learn More
Jan
10
12:00 pm
-
1:00 pm

Complying with FinCEN’s Beneficial Ownership Reporting Rule Under the Corporate Transparency Act Webinar

Learn More

Get in Touch

Our attorneys, paralegals and staff look forward to hearing from you. Please reach out to let us know how we can help.

Get In Touch
RECOGNIZED IN
Super Lawyers
Best Law Firms US News
Best Lawyers