Convert Your Limited Partnership into a Limited Liability Limited Partnership

The Texas Legislature made several changes to the Texas Business Organizations Code (BOC) that become effective September 1, 2011. Several of these changes deal with limited liability partnerships. I have, until now, not advised my clients to make use of the limited liability partnership provisions in the BOC because of their administrative difficulties and questionable liability protections. Those impediments have been removed. So, I am now advising my limited partnership and general partnership clients to take advantage of the limited liability partnership provisions unless the annual filing fees prove to outweigh the liability protections offered to LLPs and LLLPs.

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Make Sure Your Compensation Plans Are in Order and Documented

I recently finished resolving a dispute between a client and the IRS regarding the amount of compensation for the founder and owner of a corporation. While the amount of compensation during one of the years at issues was probably unjustifiably high if viewed by itself, the person's compensation over the years (and including the year in dispute) was readily justifiable when viewed over the entire period that the person worked for the business. We ended up resolving the dispute and the resolution was within $50,000 in compensation from my initial evaluation of the case. But it was an expensive "victory" for the client.

The strongest point for the IRS, and the reason it took as much time and expense to resolve, was the client’s lack of documentation of a consistently applied compensation plan. The client had annual minutes (which many clients do not), but those minutes did not address how the owner’s compensation was determined. The client also did not have a written employment agreement, nor did they have any written (or “understood”) basis for calculating the client’s incentive compensation each year. This lack of a consciously determined pattern to the compensation ended up costing the client several thousand dollars in attorneys fees, and a like amount in additional taxes.

The moral of the story: properly pay and report compensation to employee/owners as such; have a written employment agreement or at least some sort of documentation in your minutes of the oral arrangements for compensation; make sure you have a documented or easily proved method for determining incentive compensation that is reasonable in amount.

 

IRS Instructs Examiners How to Seek Approval to Apply Economic Substance Doctrine

In a July 15th directive from IRS's Large Business & International (LB&I) Division, the IRS issued guidance to managers and examiners on when to seek the approval of the Director of Field Operations (DFO) for asserting the economic substance doctrine. The directive lays out a multi-step analysis for examiners to complete before submitting their requests to the DFO.

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Form 990: Could yours be front page news?

One major difference between Form 990 and the tax forms filed by individuals and businesses has to do with privacy and confidentiality. On Form 990, almost nothing (except the list of donors' names) is private or confidential. The financial data of exempt organizations is out there for the world to see—and now that many Web sites carry copies of Forms 990, "the world" is probably not an exaggeration.

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