There have been a series of changes over the past year in federal regulations that impact your old LLC operating agreement. Since I see on a regular basis operating agreements that do not incorporate the changes in the regulations, I thought I would mention a key change in this post. With the new regulations there is no longer a “tax matters partner” which you will see in most operating agreements. Instead, the LLC (partnership) must designate a Partnership Representative (the “PR”) who does not need to be a partner. The PR is similar to, but is different from, the tax matters partner. Formerly, the LLC/partnership was required to designate a tax matters partner to act as a liaison between the partnership and the IRS. That tax matters partner was required to be a general partner 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 changes this past year, the PR is not required to be a partner, and can be any person (including an individual or an entity) with a substantial presence in the U.S. The PR has the sole authority to bind the partnership, and ALL partners and the partnership and its partners are bound by the actions of the PR and any final decision in a proceeding brought under the new regulations. In addition, the new regulations do not include a statutory right to notice of, or to participate in, the partnership-level proceeding for any person other than the partnership and the PR. If a partnership does not designate a PR, the IRS may select any person as the partnership representative, with certain limitations. A disregarded entity can also be the PR.
LLC members should consider amending their operating agreements because the powers of the PR with respect to the members/partners can be adjusted through the operating agreement. For example, a member/partner generally should have the right to approve or participate in certain actions of the PR. In addition, partners generally should have notification by the PR regarding certain events. Finally, the PR generally will want to be indemnified by the partnership for actions performed and costs incurred in good faith in the capacity as the PR. Keep in mind there is no requirement that the IRS communicate with the partners so these may be important provisions to amend in the operating agreement.
Be sure to talk with your tax accountant or your business/tax attorney regarding these issues.