Transfers of members’ interests in a single-member LLC are quite different from transfers of interests of members in LLCs with two or more members. Transfer of part of a single member’s interest changes the fundamental nature of the LLC—converting it to a two-member LLC. Transfer of a single member’s entire interest in effect transfers ownership of the LLC’s business. In either case, the transaction is treated for tax purposes as if the single member sold an interest in LLC assets rather than an interest in an entity. As a result, an assignment of an interest in a single-member LLC must address a different set of concerns than are involved if the interest is in a multi-member LLC, and an assignment of part of an interest involves different concerns than are involved if the single member’s entire interest is transferred. We have developed a new form, Form 5.7, designed for use in transferring interests of members in single-member LLCs. The form includes two different forms of assignment—one for transfer of a partial interest and the other for transfer of the member’s entire interest.
We try to offer forms of the highest quality that reflect current law and practice. This requires that they be revised regularly. The following forms have been revised as of July 2011:
The first two forms are designed for transfers of LLC members’ interests to others, whether by sale, exchange, or gift. The withdrawal agreement deals with the purchase of a member’s interest by the LLC upon retirement, death, or resignation. The final four forms transfer various types of property to an LLC in exchange for an interest as a member.
LLCs in which members of a married couple are the only owners are extremely popular. They are used to operate small businesses and are being used increasingly to hold rental real estate. The beauty of husband wife LLCs is that the members enjoy limited liability protections but the existence of the LLC is ignored for income tax purposes, so the members can file their tax returns as if the LLC did not exist. Like other LLCs, a husband and wife LLC needs to file articles of organization, its members must transfer assets to it, and an operating agreement must be signed. Most operating agreement forms are designed for LLCs in which the members are unrelated. Extensive provisions are included relating such things as future capital contributions, required distributions to pay taxes, and the rights of other members to purchase the interest of a member who dies. These provisions are unnecessary if spouses will be the only members, and including them not only makes the operating agreement longer than necessary, it can also create ambiguities. Our Form 3.1, Operating Agreement for Husband and Wife LLC, leaves out the unnecessary provisions, creating a concise, easy-to-understand document.
Increasing numbers of businesses are choosing to operate as limited liability companies taxed as S corporations. This form of organization, which involves an entity organized as an LLC under state law that makes an election to be treated as an S corporation for tax purposes, takes advantage of the best of both types of entity. An LLC possesses a flexible management structure, allowing it to be operated like a partnership and avoiding required corporate formalities. An S corporation, on the other hand, enjoys favorable employment tax treatment. An S corporation’s shareholders are not subject to employment taxes on corporate income except to the extent it is distributed to them as salaries or other compensation. Income distributed as dividends or accumulated for capital needs is not subject to employment taxes. In comparison, members of an LLC taxed as a partnership must pay self-employment tax on their shares of the LLC’s income in the year it is earned, whether or not any of it is distributed. The Internal Revenue Code requires an entity taxed as an S corporation to meet certain requirements. If they are not met, the entity cannot make an S corporation election, and if they cease to be met, the entity’s S corporation election is terminated. Standard LLC operating agreements lack the provisions necessary to address these requirements. Our Form 3.4, Operating Agreement for LLC Taxed as an S Corporation is specifically designed for LLCs that elect to be taxed as S corporations. Home | What's New
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