 |
Word Format
$49.95 |
RTF Format
$49.95 |
 |
|
Price: $49.95
Revised: November 2012 - 34 pages
Description:
Form 2.5 is an operating agreement for an LLC with two or more members that is managed by its members and allocates its profits or makes distributions to its members in a manner that is not proportionate to the amount of capital they have contributed. In tax terminology, this is a “special allocation.”
An example of an LLC with a special allocation is one with three members, two of whom contribute capital and one who contributes services, who share profits and distributions equally. Another example is an LLC with three members who each contribute one-third of the capital, but one member who is in a higher tax bracket than the others is allocated a larger share of the start-up losses. In either case, capital contributions can be made in money or property—the amount of a property contribution is based on the value the members place on it.
A special allocation is effective for tax purposes and the IRS can’t reallocate an LLC’s income and loss between its members if its operating agreement contains a “qualified income offset.” Such a provision is designed to make certain that members do not share in tax benefits created by the LLC unless they bear the corresponding economic consequences.
Form 2.5 has a qualified income offset provision. But if an LLC will purchase property using nonrecourse financing for which no member has personal liability, its operating agreement also needs a “capital gain chargeback” in order to ensure tax recognition of its allocations.
The form of management envisioned by Form 2.5 is much like that of a partnership—all members have a right to participate in management and the authority to act for the LLC. Disagreements are resolved by a vote of members based on their proportionate interests in profits. This is the management structure of choice for closely-held LLCs, but if an LLC has a large number of members or if some members do not actively participate in the LLC’s business, consideration should be given to having the LLC managed by managers.
The participation of the members is often critical to the LLCs business, so this form restricts transfers of members’ interests. It also provides for the LLC’s purchase of interests of members who die or otherwise dissociate. These buy-sell provisions are designed to protect the integrity of the ownership-management group and also provide a means for members or their successors to liquidate their interests at a reasonable price.
|
