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What is a Limited Partnership?

What is a limited partnership? Previously, a Denver business attorney from The McGuire Law Firm has discussed certain types of entities including partnerships in previous articles.  The article below will discuss a limited partnership.

A limited partnership could be considered a type of hybrid business structure because there are multiple types of partners/members. In a limited partnership there must be at least one partner who is liable for the debts of the partnership, and other business obligations.  Additionally, there must be at least one limited partner who is not liable and responsible for the business.  In comparison to a general partnership, a limited partnership cannot be formed simply by conduct.  Remember, a general partnership can be formed when two or more people begin conducting business for a profit.  A limited partnership must file the appropriate forms and papers with the necessary state agency such as the secretary of state.

The general partner will have management authority and will thus operate and manage the partnership and related business affairs.  The limited partner acts more as a passive investor, and does not have the responsibility of managing the business.  Thus, what can you compare a limited partner to?  In many respects, a limited partner is similar to a shareholder in a corporation.  The limited partner invests in the partnership and under the worst case scenario they may lose their investment, but such limited partner is not responsible for the debts and obligations of the partnership.  If a limited partner does exert too much control or dominance over the general partner or general partners, the limited partner could actually be liable for the business debts.  By exerting such control, the limited partner has de facto become a general partner of the limited partnership and thus exposed themselves to liability.  Different acts control such issues within a limited partnership and state law and case law should always be researched and reviewed.  Many current laws also allow business agreements that tailor the relationship between the partners and between the partners and the business. This may include tailoring the fiduciary duties a partner may have to the partnership and a partner not being liable for a breach of a fiduciary duty when one would expect such partner to be liable.  In many respects, it appears the fiduciary duties of a partner in a limited partnership can be limited more so than in a general partnership.

For tax purposes, a limited partnership is a pass through entity whereby the entity is not taxed, but items are passed through to the individual partners.

The one major drawback to the limited partnership is the exposure to the general partner.  Thus, most general partners within a limited partnership today would be corporations.  Because of the limited liability afforded to those who own and run the corporation, a limited partnership with a corporate general partner should help prevent personal exposure.

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Member Managed LLC

A limited liability company (LLC) can be managed by a manger or managers, or the LLC can be managed by the members of the LLC.  There are advantages to both depending upon the circumstances of the business, the knowledge of the members, the involvement of the members and other issues.  For example, the members of a certain LLC may all be passive investors of the LLC and have little knowledge regarding the operations of the LLC.  Thus, it may be best to hire a professional manager or individual that has better know how regarding the subject matter or area in which the LLC is operating.  Furthermore, the members of an LLC may have no interest and not want to manage the LLC and thus hiring a manager or managers maybe more prudent.  On the flip side, the LLC may have a small number of members and the members are well versed and experienced in terms of operating a business and the area in which the LLC is operating.  Under such circumstances, it is likely the members themselves would want to manage the LLC.

In Colorado, you state whether the LLC is member managed or manager managed within the Articles of Organization.  The operating agreement of the LLC will state and control the powers of the manager or managers, or the members as they manage the LLC.  It is recommended that the managers responsibilities and powers be well defined in the LLC operating agreement.

The video below has been prepared by a Denver business attorney to provide more information regarding the management structure and options of an LLC.  Please remember this article and video are for informational purposes.  It is recommended that you speak with your business attorney regarding the management structure of your business.

Contact The McGuire Law Firm to discuss your business questions and issues with a Denver business attorney.  A free consultation is offered to all potential clients!



Cash for Assets Business Acquisition

In previous articles a business attorney from The McGuire Law Firm has discussed certain acquisitions between corporations.  The article below will discuss an acquisition known as a cash for assets acquisition.

The first step of a cash for assets acquisition, Corporation 1 would pay Corporation 2 cash consideration of the assets of Corporation 2.  Corporation 1 could decide to accept the liabilities of Corporation 2, and such acceptance would lower the purchase price.  Please note, Corporation 1 does not have to accept the liabilities of Corporation 2 in this type of asset acquisition though. No change would be necessary in the corporation documents of Corporation 1 or Corporation 2 and no change would need to occur in the outstanding shares of either corporation as well.  After the purchase, and as may be commonly seen, Corporation 2 could dissolve after the sale of the corporate assets.  If Corporation 2 did dissolve, the corporate charter would be cancelled and the shares extinguished.  After Corporation 2 satisfied all remaining liabilities, the remaining cash would be distributed to the shareholders of Corporation 2 in a liquidating distribution.  The dissolution and liquidation of Corporation 2 would not impact the shareholders of Corporation 1.

If Corporation 2 did not dissolve and distribute the cash to the corporate shareholders, Corporation 2 would reinvest the cash in operating assets or for corporate operations.  If Corporation 2 reinvested this cash in passive assets such as stocks or bonds, it is important to know that the Internal Revenue Code could deem Corporation 2 a Personal Holding Company and such designation may not have the most favorable tax treatment.  Thus, from a practical point of view, a corporation in Corporation 2’s shoes, is likely to reinvest in business assets to produce income, or dissolve and distribute the monies to the shareholders.

The cash for assets acquisition differs from a stock swap merger in a couple of ways.  First, the shareholders of Corporation 1 shareholders do not vote in the asset acquisition.  Second, the post transaction of the Corporation 2 shareholders is different as in the cash acquisition the shareholders will be cashed out as opposed to holding shares in the survivor corporation.  Third, Corporation 2’s pre-transaction liabilities may remain with Corporation 2 depending upon the terms of the transaction.  Additionally, a stock swap merger, also known as an A Reorganization is typically a tax free transaction, whereas the cash for assets acquisition is likely to be a taxable transaction.

You can speak with a Denver business attorney at The McGuire Law Firm if you have questions regarding a business transaction and/or the tax implications of a business transaction.

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Series of Distributions to a Withdrawing Partner

When a partner in a partnership is having their interest terminated, often such termination may be through a series of distributions.  The series of distributions may be needed due to the cash flow of the buyer or purchaser. Thus, the question arises, are these liquidating distributions?  The article below has been drafted by a Denver tax attorney to provide information regarding a series of distributions to a partner in a partnership in liquidation of the partner’s interest.  Discuss your partnership tax matters and questions with a tax attorney in Denver by contacting The McGuire Law Firm.

When a withdrawing partner’s interest is terminated through multiple, or a series of distributions to the partner, each distribution can be considered a liquidating distribution as opposed to a current distribution.  This is so even if the partner is a tax partner until the final distribution is made (see IRC Section 761) and recognizes gain only after total, actual or the constructive money distributions would exceed the outside basis of the partner’s partnership basis.  Therefore, this is not necessarily installment sale treatment, but rather open transaction treatment.  It is also important to note that a withdrawing partner can only recognize a loss once the final liquidating distribution is received.

The partnership’s obligation to make the distribution is not treated as a cash equivalent for a cash method taxpayer nor is it treated as an obligation for an accrual method taxpayer.  Under IRC Section 736, the obligation to make these deferred payments is not a debt obligation.  Thus, the liquidating distributions can be made by the partnership to the partner as a debt obligation that liquidates the interest immediately and thus the withdrawing partner is considered more as a creditor than as a partner of the partnership.

For example, John is withdrawing from J Cubed, LLC and the partnership agreement satisfies the special allocation regulations.  John is entitled to receive $100k upon his withdrawal.  Half is payable upon withdrawal and the other half in the year after the withdrawal.  John’s outside partnership basis is $75,000.  Thus, assuming there is no 751 Exchange, John will not recognize gain on the initial distribution of $50,000 because of the $75,000 in outside basis and gain recognition rules.  All of the $25,000 gain John will recognize will be recognized upon the second distribution.  J Cubed’s obligation to make the second $50,000 distribution is not a debt obligation.  The gain of $25,000 may be capital gain, but one should always considerable the collapsible partnership rule.  Assuming John had an outside basis of $150,000 and received the same $100,000 total in distributions, the loss could not be recognized until the second payment was made.

If you have tax questions relating to the sale of a business or business interest, discuss these questions and issues with a Denver tax attorney at The McGuire Law Firm.  You can schedule a free consultation with a tax attorney in Denver who can assist you with your matters.

Denver Business Attorney Video on Contributing Property to a Partnership

When a partnership is formed the partners will generally contribute property to the partnership in the form of cash and/or property.  These contributions of property impact the partner’s basis and capital account in the partnership and thus may impact tax matters in the future.  A contribution of property will generally increase a partner’s capital account and a distribution of property from the partnership to the partner will generally decrease a partner’s capital account in the partnership.

The video below has been prepared by a business attorney at The McGuire Law Firm to provide general information regarding the contribution of property to a partnership.  You should speak directly with your business attorney or tax attorney regarding your partnership matters and the contribution of property.

Contact The McGuire Law Firm to speak with a business attorney or tax attorney in Denver or Golden Colorado.

Controlled Partnership Transactions

Previous articles posted from The McGuire Law Firm have discussed controlled entities and certain related party issues.  The article below has been prepared by a tax attorney at The McGuire Law Firm to discuss controlled partnership transactions.

A controlled partnership is a partnership of which 50% (fifty percent) or more of the capital interest or profits interest is directly or indirectly owned by or for such person.  A gain that is recognized in a controlled partnership transaction may be ordinary income.  The gain can be ordinary if the gain is the result of a sale or exchange of property that in the hands of the party receiving the property is a noncapital asset such as accounts receivable, inventory or depreciable or real property used in a trade or business.  A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities:

–          A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership

–          Two partnerships, if the same person directly or indirectly own more than 50% of the capital interests or profits interest in both partnership

How is ownership determined?  Under most situations, stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries.  However, one should note that for a partnership interest that is owned by or for a C corporation, the above rule should only apply to those shareholders who directly or indirectly own 5% or more in value of the stock of the corporation.

An individual will be considered to own the stock or partnership interest directly or indirectly owned by or for his or her family.  So what constitutes family?  Family would include only sisters, brothers, half-sisters, half-brothers, a spouse, ancestors and lineal descendants.  In applying these rules, stock or a partnership interests that are constructively owned by a person via ownership in an entity is treated as actually owned by that person.  However, stock or a partnership interest that is constructively owned by an individual through a family member is not treated as owned by the individual for reapplying this rule to make another family member the constructive owner of tat stock or partnership interest.  No “double-dipping” so to speak in terms of this type of constructive ownership.

You can discuss your tax and business transaction matters with a tax attorney or business attorney at The McGuire Law Firm.  The McGuire Law Firm offers a free consultation to all potential clients.  Contact a tax attorney in Denver by contacting The McGuire Law Firm.

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Manager Managed LLC

A Limited Liability Company can decide whether to be manager managed or member managed.  When manager managed, one or more managers will make the pertinent business decisions for the LLC.  Having an LLC manager can have its advantages and disadvantages.  A Denver business attorney from The McGuire Law Firm has prepared the article and video below to discuss a manager managed LLC.

A manager for an LLC may be beneficial when the LLC has many members, and maybe more so when these members are passive and do not actively participate in the day to day operations of the business. Under such a situation, a manager well versed in operating a business such as an LLC and with experience in the business industry the business is operating in, may work well for the company.  On the other hand, if the members of the LLC are few or fewer, and these members actively participate in operating the business each day, then the members themselves may want to manage the LLC, and thus the LLC would be member managed.  Each business and the business owners must make important decisions as to how a business will operate and no two businesses will operate in entirely the same manner.  That being said, you may find it more likely to see a manager managed LLC when there are a larger number of members (maybe eight to ten or significantly more) and/or some or the majority of the members are not actively involved with the business operations.  For example, if thirty individuals invested in a partnership that was purchasing and selling real estate and most of the members were passive investors, and real estate was not their expertise, you may find this LLC to be manager managed.  However, if three individuals formed an LLC to purchase and sell real estate and one was a real estate broker, the other a contractor to fix up the houses and the third an attorney to draft up the partnership documents and contracts, this LLC would probably be more likely to be member managed.

As stated above, the choice to be manager managed or member managed is a question that will be answered by the business owners and typically the overall size of the business, nature of the business and day to day involvement of the partners.  There is no right or wrong answer for each business, and an LLC that begins as a member managed LLC, may end up choosing to be a manager managed LLC after the business operates and the partners see the need for one or a few individuals to be making certain decisions for the business.

If you have questions regarding the operation of your LLC or other business issues speak with a Denver business attorney and tax attorney at The McGuire Law Firm.

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Asset Sale Discussed by Denver Business Attorney

Generally speaking when one business buys or acquires another business the transaction can be either an asset sale or a stock sale.  There are different tax implications, liability matters and other issues depending upon how the transaction is set up.  The video below has been prepared by a Denver business attorney at The McGuire Law Firm to discuss general matters relating to an asset sale.  Please remember that the information provided in the video below is for informational purposes.  You should always contact your business attorney and/or tax attorney to discuss the sale or purchase of any business assets or the stock of a corporation.

If you feel the need to speak with a business attorney in Denver, please contact The McGuire Law Firm to schedule a consultation.

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Shareholder Issues in an S Corporation

An S Corporation is a corporation that has made an election with the Internal Revenue Service to be taxed as an S Corporation.  As such, an S Corporation is a pass through entity whereby the shareholders claim the corporate items of income, gain, loss etc on their 1040 Individual Income Tax Returns.

To be eligible for an S corporation election and to maintain the status as an S corporation the Internal Revenue Code mandates the S corporation allow only a certain number and types of shareholders.  For example, currently, I believe an S corporation can have only 100 shareholders and only one class of stock.  This differs from a C corporation as C corporation can or could have many more shareholders and many different types of stock.  For example, a C corporation can have multiple classes of stock, such as common stock, preferred stock, A shares, B shares etc.  Additionally, generally only individuals can be a shareholder in an S corporation.  Some exceptions apply for specific types of trusts (QSSTs).

A corporation will initially file their articles of incorporation with the secretary of state and thereafter file the election with the IRS to be taxed as an S corporation.  Form 2553 can be filed with the IRS to make the S election.  If the S corporation violates the Internal Revenue Code with a disallowed shareholder, the corporation can lose its S corporation status and be taxed as a C corporation, which could be very disadvantageous to the corporation and the shareholders.

In addition to the allowable shareholders and related issues, a corporation that operated as a C corporation for some time and then made the S corporation election must consider additional issues such as built in gain matters, which refer to the gain in certain assets at the time the corporation made the S corporation election.

If you have questions related to your choice of entity, entity structure or the taxation of your business or certain business transactions, speak with a Denver business attorney and tax attorney at The McGuire Law Firm.  The McGuire Law Firm offers a free consultation where you can meet with an attorney and discuss your current business operations, business questions and tax questions.

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What is Fair Market Value?

In terms of a business transaction, such as an asset sale, stock sale or otherwise, how would you define fair market value and why do we care?  One could define fair market value as what a knowledgeable and willing buyer under no compulsion to buy would pay and what a knowledgeable and willing seller under no compulsion to sell would sell an item for in an arm’s length transaction.

Ok, so in short, fair market value is what someone is willing to pay and what someone is willing to sell an item for, but what is an arm’s length transaction?  Arm’s length is referring to the relationship between the parties.  When related parties, such as father and son, mother and daughter, grandfather and grandson etc. enter into a transaction, such transaction may not be considered arm’s length because of your relationship.  The idea or thinking is that you would be more willing or likely to give a family member a “deal” on the purchase or sale of an item.  The Internal Revenue Service takes into account and considers related parties in regards to the tax treatment of certain items and transactions in the Internal Revenue Code.

Why do we care about fair market value?  You may care for many reasons, and a few will be discussed below.  If fair market value is not provided or exchanged in a transaction, the transaction could be considered part sale and part gift.  This part sale and part gift issue brings in too many issues to discuss within this article, but in short implicates gift matters, gift exclusion issues etc.  In terms of inheriting an asset, when you inherit property, you take such property with a stepped up basis, meaning your basis is the fair market value of the property on the decedent’s date of death (or there could be an alternative valuation date).  Thus, the current fair market value of an item becomes very important as it can dictate your basis in an asset and thus the gain whenever the asset is sold, transferred or disposed of

The video below has been prepared by a tax attorney and business attorney at The McGuire Law Firm.  The McGuire Law Firm hopes that you have found this information useful.  If you have questions relating to the tax treatment of an individual transaction or a business transaction, you can schedule a free consultation with an attorney by contacting the firm.

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