Say Goodbye to the “Tax Matters Partner” and Hello to the “Partnership Representative”

There have been a series of changes over the past year in the Treasury Regulations that likely impact your old LLC Operating Agreement. One change is that there is no longer a “tax matters partner” (also referred to as a tax matters member) which you will see in most operating agreements (at least for multi-member LLCs classified as partnerships for tax purposes—our working assumption for purposes of this post). Instead, LLCs must now designate a Partnership Representative (the “PR”) who does not need to be a partner. The role of PR is similar to the old tax matters partner. Under prior law, the LLC was required to designate a tax matters partner to act as a liaison between the LLC and the IRS. That tax matters partner was required to be a general partner or managing member and could be an individual or an entity. The tax matters partner had the authority to bind the partnership, but not to bind other partners in the partnership. Also, a partner that was not the tax matters partner had rights during an examination, including certain notification rights and the right to participate in the proceeding.

Under the recent changes, the PR is not required to be a partner and can be any person (individual or entity) with a substantial presence in the United States. The PR has the sole authority to bind the LLC, and ALL members and the LLC are bound by the actions of the PR and any final decision of the PR in a proceeding brought under the new regulations. Also, the new regulations do not include a statutory right to notice of, or to participate in, LLC-level proceedings for any person other than the LLC and the PR. If a partnership does not designate a PR, the IRS may select any person as the partnership representative (subject to a few limitations).

If you are an owner of a limited liability company with one or more business partners, you should consider amending your LLC’s Operating Agreement because the powers of the PR with respect to LLC members/partners can be adjusted through the Operating Agreement. For example, a member/partner arguably should have the right to approve or participate in certain actions of the PR. Further, LLC members generally should be notified by the PR regarding certain events. Finally, a PR typically will want to be indemnified by the LLC for actions performed and costs incurred in good faith in the capacity as PR.

It would be a good idea to speak with your accountant or your business attorney regarding this recent development in partnership tax law. Contact us if we can help prepare an amendment to your LLC Operating Agreement.