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  1. #1
    Join Date
    Dec 2016

    Default Tax Provisions in LLC Operating Agreement

    My question involves business law in the state of: California.

    I am drafting an operating agreement for an LLC that will elect to be taxed as a C corporation. The C corp tax election is avoid complications from with holdings for certain investors that are not US taxpayers.

    My question is about the operating agreement: do I need to include the complex tax provisions that are commonly found in "long form" operating agreements?

    I believe the answer is no. The tax provisions do not have to be included because those provisions are to ensure compliance with IRS regulations related to partnership taxation, primarily IRC section 704. Because the LLC will chose C corporation taxation, the partnership taxation issues should not be relevant.

    Can any one confirm or comment?

    Are there other tax issues that should be included in the operating agreement if the LLC chooses C corp taxation?

  2. #2
    Join Date
    Oct 2014

    Default Re: Tax Provisions in LLC Operating Agreement

    The short answer is that the operating agreement needs to address those tax issues that will occur given that it will be taxed as a C corporation. It does not need to include any partnership tax provisions that would be found in a partnership agreement (including a LLC operating agreement that will be taxed as a partnership) for the simple reason that it is not taxed as a partnership.

    Distributions with respect to foreign owners of the LLC (who are viewed like corporate shareholders for U.S. federal income tax purposes) that are treated as dividends under the Internal Revenue Code (IRC) will be subject to withholding at a 30% rate under IRC 1441 unless a tax treaty provides for a lower rate of withholding. The foreign owners will need to understand that. In addition, if the LLC qualifies as a U.S. Real Property Interest (USRPI) under IRC 1445 then the foreign owners will also face withholding requirements when they sell their interests in the LLC, too. There may be other tax provisions that apply as well depending on the details of the business that the LLC does and its relationship with the foreign owners. It would be a good idea for the LLC to consult a tax attorney familiar with the U.S. taxation of foreign persons to review exactly what the LLC will do and get advice on what obligations the LLC will have and how to address those in the LLC charter and operating agreement.

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