By: Stacey Shea – Published in the BizWest Thought Leaders column in December 2019.
While you are not required to have an LLC or Partnership Operating Agreement, your attorney will recommend that you do. The Operating Agreement (“OA”) is the controlling document for the operations of your company. But it is not enough just to have one. Ensuring your OA is up to date and accurately reflects your company structure is vital.
There are several reasons to review and consider updating your OA. If there have been any changes in membership structure, distribution of profits and losses, or management processes, it is time to ensure that your OA accurately reflects how your company is operating.
Additionally, if the company is taxed as a partnership you will need to update your OA in response to changes in tax law. Prior tax code called for the designation of a Tax Matters Partner to be the primary point of contact with the IRS for audit related correspondence. The Tax Matters Partner designation has been replaced with the Partnership Representative under IRC §6223(a) for the convenience of the IRS, not the taxpayers.
The new Partnership Representative (“PR”) is granted broad authority to bind the company and its members on dealings with the IRS. The new PR also no longer has the duty of notice to members that the Tax Matters Partner did. Additionally, the IRS has the authority to assign a PR on the Company’s behalf if it fails to do so. While everyone hopes to never be subject to audit, waiting until you receive IRS notice of just that is not the time to think about your PR. It is best to update your OA now to identify your PR, detail their duties and obligations to the company, and make it clear what authority they have to act on behalf of the company.
An annual Review of your OA to ensure your company is complying with its own rules and procedures, as well as current law, is just good practice. However, with ever changing law and policy, it is more important now than ever.
Stacey is currently a May 2020 LL.M. taxation candidate at Villanova University. She is also a member of the Colorado Bar Association.Her practice at Otis & Bedingfield, LLC focuses on business and real estate transactions.
Latest posts by Stacey Shea (see all)
- It Might Be Time to Amend Your Operating Agreement - December 1, 2019