Tax Matters

S corps, limited liability companies (“LLCs”) and partnerships are taxed under a "flow-through regime" of the Internal Revenue Code, generally governed by the provisions in the 700s of the Code (sometimes referred to as 'Subchapter K').  Due to the complexity of the partnership rules and regulations, it is imperative to have experienced professionals advising on several key tax aspects:

  • Ownership and Equity Positions

  • The Formation of Entities

  • The Creation of the Partnership/Operating Agreement, including:

    • Classes of Ownership Units

    • Waterfall Provisions for Distributions and Liquidation

    • Tax Provisions for Allocations of items of Income, Gain, Losses and Deduction to have "Substantial Economic Effect" under the 1.704-1 Treasury Regulations

    • Tax Provisions for Depreciation and Special Allocations

    • Tax Provisions for Partnership "Nonrecourse" Liabilities, Partnership Minimum Gain and Minimum Gain Chargeback

  • Allocations of Income, Gain, Loss, Depreciation and other Deductions for Tax Returns and Schedule K-1s

  • The maintenance of Capital Accounts for Partnership Book and for Tax Returns/Schedule K-1s

  • The Tax Basis for Owner's/Partner's interest in the Company/Partnership

  • The structure General and Limited Partners in investment structures that are tax efficient

All of these are important aspects that can affect the manner in which the owners of the Company report their income on their individual tax returns or even operate their business.

Estel Law provides answers to these questions based on a depth of experience in advising LLCs, S Corps and partnerships on complying with the various Code sections and Treasury Regulations that may apply.  If there is a question regarding any aspect of a Company's partnership tax return on its form 1065, its schedules, or a partner's tax return, Estel Law will seek to provide the answer.


Estel Law also believes that an overarching solution to the complexity of the partnership rules and regulations is simplicity.  There are mechanisms to first consider that will simplify the ownership and reporting requirements for many Companies. 

Operating Agreements

Since most partnership and operating agreements contain provisions for various tax and ownership matters, Estel Law has extensive experience drafting such agreements.  While the tax matters portions of an LLC operating agreement may be only several sections, many other provisions of the operating agreement reference it.

For owners and investors that are expecting to make use of many deductions, including bonus depreciation deductions newly (re)enacted, the Operating Agreement (and its compliance with the Treasury Regulations for Substantial Economic Effect) is of the greatest importance.  Consulting with an attorney experienced in advising clients on the effects of the various rules for allocating deductions can ensure both savings in the present and being mindful of future footfalls that often occur.

Grants of Partnership Interests

Generally, an owner may consider granting equity in the Company to an employee for the employee's work.  This may trigger taxable income to the employee, though it need not if a profits interest is anticipated in the operating agreement and then implemented with a profits interest grant.

Profits Interest grants are a grant of equity for LLCs and partnership due to their beneficial tax treatments.  Generally, these are grants from the company to an employee that give the employee the right to a percent of the company's appreciation in value from the date of the grant to the date of the sale. In order to qualify for such a grant, the Company should have already contemplated it within applicable provisions in its Operating/Partnership Agreement that detail how the pay out to a holder of a Profits Interest will occur upon the liquidation and/or sale of the Company.

To talk to a tax attorney on these partnership tax matters, reach out today.

Experience & Capabilities

    • Created an Operating Agreement and Profits Interest Award Agreement for emerging technological product company.

    • Engaged a 409A valuation company for client to have start up valued.

    • Advised on distributions of partnership payments to partners for capital accounts.

    • Reviewed tax returns Form 1065s and schedule K-1s to determine the partner’s share of liabilities.

    • Determined applicability of Section 165 loss rules in connection to partnership tax year deduction.

    • Prepared Capital Accounts for Partnership Form 1065 Tax Filing.

    • Drafted Operating Agreements and Partnership Agreements for multi-million dollar investment portfolio.

    • Advised on the tax consequences for sale of a partnership interest in holding company.

    • Structuring, restructuring or recapitalizing your partnerships, LLCs or other entities.

    • Drafting Partnership Agreements and LLC Operating Agreements.

    • Ensuring your Partnership Agreement or Operating Agreement has tax section that complies with the requirements of Treasury Regulation § 1.704-1(b)(2)(iv) regulations and associated regs for any Partnership Minimum Gain and/or Chargeback Provision.

    • Advising on and drafting grants of Profits Interest Awards in your LLC, including creating a distribution threshold based on a 409A valuation.

    • Advising on strategies for Investment Managers and drafting Investment Management Agreements for General Partners and fund Manager.

    • Advising on the tax, or other legal, considerations for any distributions to be made to the partners or any capital call required by the partners.

    • Advising on federal tax questions that arise in the ordinary course of your LLC or partnerships business, or during bankruptcy or any settlement or litigation.