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
April 26, 2023

Barley Snyder Partner Frederick M. Nice Appointed to the Foundation for the Reading Public Museum’s Board of Directors

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

Learn More
Press Release
April 19, 2023

Barley Snyder Attorney Sarah Rubright McCahon Named Lehigh Valley Business “Women of Influence” Honoree

For Immediate Release Reading, Pa. – We are pleased to announce that Barl...

Learn More
News Alert
April 11, 2023

Major Changes to Pennsylvania Corporate Law – Part 5: Internal Corporate Procedures

This is Part 5 of a multipart series which will provide a summary of the ke...

Learn More

Other Upcoming Events

View All Upcoming Events
7:30 am
10:45 am

Wake Up With Barley – A Morning on Real Estate 2023

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
Super Lawyers
Best Law Firms US News
Best Lawyers