Llc Membership Interest Redemption Agreement
In accordance with the relevant legal provisions of Sub-Chapter K of the Internal Revenue Code (IRC), LLC members benefit from a certain flexibility in the distribution of their tax burdens by structuring the sale or withdrawal transaction. The tax differences between the sale and the withdrawal can be significant, since the profits of the outgoing member and the tax base of the remaining members are treated differently. Other factors that affect tax treatment may be whether LLC`s assets are the so-called “hot assets” within the meaning of CRI 751 (i.e.B. inventory and unfulled receivables), if payments to the outgoing member are made in tranches, if LLC`s ownership is distributed to the outgoing member instead of cash (or a mixture of both), if the goodor is considered part of LLC`s assets, if the outgoing member`s interest repayment is financed by an LLC debt certificate; and whether the outgoing member`s contribution to LLC was in the form of a service instead of cash and property. There are cases where the IRS can look behind the form chosen by the parties and re-characterize the transaction. Such a case is the case where the withdrawal appears to be funded by the contribution of a remaining member to the LLC. Another is if the interests of the remaining members do not increase prorated after the transaction. The Foxman case illustrates the flexibility of LLC members to allocate their tax burdens to a certain extent and the importance of consistent and clear documentation. The choice of sale or withdrawal by the parties is generally respected by the tax authorities as long as the supporting documents are in accordance with the intentions of the members. Withdrawal agreements are usually related to who can buy or collect interest from the outgoing owner and the price or method of determining the price of that interest. In addition, these contracts also describe the events that would trigger the withdrawal, sale or transfer of ownership shares. As a result, these agreements are beneficial in tightly managed businesses, as they allow owners to establish a succession plan for outgoing owners and maintain business continuity before problems arise.
In addition, withdrawal agreements are agreements between the owners and the company for which the company itself is required to honor the outgoing owner`s shares of ownership. On the other hand, an agreement for the sale of ownership shares generally provides that an outgoing owner is required to sell or offer his shares of ownership to the remaining owners. Similarly, a transfer or participation agreement generally provides that an outgoing owner must transfer his shares of ownership to designated natural or legal persons. In summary, targeted structuring and proper documentation will be of service to all parties and their lawyers.. . . .