LLC FORMATION CHECKLIST – Page 1media.straffordpub.com/products/irc-199a-practice...2019/06/11 · LLC FORMATION CHECKLIST – Page 1 LLC FORMATION MASTER CHECKLIST Preliminary

LLC FORMATION CHECKLIST – Page 1

LLC FORMATION MASTER CHECKLIST

Preliminary Notes

1. The checklist in the table below (the “Table”) identifies the 36 principal tax and non-tax legal tasks that should normally be performed for clients who want comprehensive LLC formation services. Column 4 of the Table identifies the chapters and exhibits in Drafting Limited Liability Company Operating Agreements that discuss these tasks. Drafting Limited Liability Company Operating Agreements is , John Cunningham’s LLC formbook and practice manual, published by Wolters Kluwer Law & Business. If you wish more information about this book, click here.

2. The order of the tasks in the Table is the order in which they should normally be performed in an LLC formation.

3. The tax task in the Table are shaded.

CHECK BOX

TASK NUMBER

DESCRIPTION OF TASK CHAPTER IN WHICH TASK IS DISCUSSED

Task 1. Handle Legal Ethics Issues. Identify and resolve with your client all issues of legal ethics relevant to your services in forming your client’s LLC. There are ten principle issues that you should address.

Chapter 8 (“How to Handle Issues of Professional Conduct pin LLC Formations”)

Task 2. Handle Initial Contact with Your Client. Handle with your client on at least a preliminary basis all of the 16 basic issues you should normally address in your initial contact with LLC formation clients.

Chapter 7 (“How to Handle Initial Contacts with LLC Formation Clients”)

Task 3. Handle Engagement Letter with Your Client. Draft an engagement letter for your client and obtain your client’s written consent to its terms.

Chapter 7 (“How to Handle Initial Contacts with LLC Formation Clients”)

Task 4. In formations of single-member LLCs whose members will be individuals, provide your clients with a memorandum listing and explaining the key legal and tax issues relevant to those formations.

Task 5. In formations of single-member LLCs whose members will be individuals, provide your clients with a memorandum listing and explaining the key legal and tax issues relevant to those formations.

Task 6. In formations of multi-member LLCs, e-mail your clients a memorandum on the key legal and tax issues in forming multi-member LLCs. If you are forming a multi-member LLC for your clients, e-mail them a memorandum on the key legal and tax issues in forming multi-member LLCs to assist them in preparing for their meeting with you. This memo will enable you to be far more efficient in identifying and addressing these issues with your clients.

Chapter 19 (“Drafting Operating Agreements for Multi-Member LLCs—Understanding and Mastering the Process”); Exhibit 19-1 (“Model Multi-member LLC Formation Issues Memorandum”)

Task 7. Determine Number of Entities Needed by Your Client. Determine with your client the number of entities she will need in your client’s business, including any necessary sister companies, holding companies and subsidiaries. If when your clients form their LLCs or thereafter, their business is likely to hold valuable business assets, they will probably need a two-LLC holding company/operating company structure.

Chapter 9 (“How to Structure Business Start-ups to Maximize Business Asset Protection—Single-Entity Structures vs. Holding Company Structures”)

http://www.aspenpublishers.com/Product.asp?catalog_name=Aspen&product_id=1454822341&promoID=DLOA20


CHECK BOX

TASK NUMBER


Task 8. Determine Relationship Among Entities Needed by Your Client. Determine with your client the optimal relationship among the entities your client will need in the relevant business. For example, should your holding company/operating company structure involve a multi-member LLC and a single-member LLC subsidiary, or should it involve two multi-member LLC sister companies?


Task 9. Determine Number and Identity of Owners of Each Entity Needed by Client. Determine with your client the optimal number and the identity of the owners of the entities she will need in the client’s business. For example, these owners should often be revocable trusts, irrevocable trusts, or husband-wife joint tenants.


Task 10. Make Non-tax Choice of Entity for Each Entity Needed by Your Client. Make a non-tax choice-of-entity analysis to determine the best type of business organization for each entity needed by your client on non-tax grounds, and advise the client of the results of this analysis.1 Your choice will almost always be an LLC, but in rare cases, it may be an limited partnership, an LLC, a state-law business corporation or a statutory trust.

Chapter 10 (“How to Handle Non-Tax Choice Of Entity”)

Task 11. Choose Governing LLC Act. Identify for your client the LLC acts potentially useful in forming the client’s LLC, and choose with the client the act that will be in the client’s best interest. The main choice will often be between your home state act and the Delaware Limited Liability Company Act.

Chapter 11 (“How to Choose the Right Governing Act in An LLC Formation—the Delaware Act vs. Other LLC Acts”)

Task 12. Choose Best Federal Income Tax Regimen for Client’s LLC for Federal Income Tax Purposes. Choose the best federal income tax regimen for your client’s LLC for federal income tax purposes. The right choice could provide major tax savings for the LLC and its members and major flexibility it might not otherwise have.

Chapter 27 (“How to Choose the Right Federal Income Tax Regimen for An LLC”)

Task 13. Choose Best Federal Income Tax Regimen for Your Client’s LLC for Social Security Tax Purposes. Choose the best federal income tax regimen for your client’s LLC for social security tax purposes. The choice for multi-member LLCs will be between using (i) partnership taxation and Prop. Reg. § 1.1402(a)-2 (the “Prop. Reg.”) or (ii) IRC Subchapter S. The right choice could save your clients thousands of dollars of Social Security and Medicare taxes a year.


Task 14. Reconcile Tasks 9 and 10. If the outcome of tasks 9 and 10 conflict, reconcile them.


Task 15. Make Check-the-Box Regulations Analysis. Make a Check-the-Box analysis and resolve any resulting conflicts among Task 7 and Tasks 9-12.

Chapter 28 (“How to Use the Check-the-Box Regulations in LLC Formations”)

1 In the rest of this table, it will be assumed that your client needs only a single entity for the conduct of the client’s business and that this entity should be an LLC.


CHECK BOX

TASK NUMBER


Task 16. Handle Multi-State Tax Planning for Your Client’s LLC. Develop an optimal state and multi-state tax plan for your client’s LLC.

Chapter 29 (“How to Handle State and Multi-State Tax Issues in LLC Formations”)

Task 17. Identify the Best Form on Which to Base Your Client’s Operating Agreement. Identify the model operating agreement (“form”) that you believe will best serve as a basis for planning, negotiating and drafting the operating agreement of your client’s LLC. Using the right form will enable you to handle the LLC formation substantially more efficiently, competently and profitable. You should have forms for all major LLC ownership structures, management structures and tax structures.

Chapter 13 (“How to Choose the Right Form for An Operating Agreement”)

Task 18. Handle the Issues Addressed in the Above Form. In consultation with your client, determine how to handle in the client’s best interest each issue addressed in the table of contents of the above form.2 The principal types of issues are generally (i) economic and tax issues, (ii) member dissociation issues, (iii) buy-sell issues, (iv) procedures for member meetings and information sharing, (v) management structure issues, (vi) fiduciary issues, (vii) dissolution issues and (viii) dispute resolution issues.

Chapter 19 (“Drafting Operating Agreements for Multi-Member LLCs—Understanding and Mastering the Process”), Exhibit 19-2; Chapter 20 (“LLC Fiduciary Law from an LLC Formation Viewpoint”) ; Chapter 20 (“Handling Fiduciary Issues in LLC Formations”)

Task 19. Choose Business Organization Law “Plug-in Provisions” for Inclusion in Your Client’s Operating Agreement. Review the list of business organization law plug-in provisions in Chapter 16, Exhibit 16-1, and determine with your client whether any provisions in this exhibit should be added to the client’s operating agreement as additional or substitute provisions. Exhibit 16-1 contains plug-in provisions, for example, for rights of first refusal, rights of first offer, drag-along provisions and tag-along provisions.

Chapter 16 (“How to Use “Plug-in Provisions” to Amend and Supplement Operating Agreements”)

Task 20. Handle Definitional Provisions in the Governing LLC Act Relevant to Your Client’s Operating Agreement. Determine with your client how to handle in the client’s best interest in the client’s operating agreement each relevant definitional provision in the governing LLC act. It is critical that the operating agreement reflect these definitional provisions on all relevant terms of art.

Chapter 17 (“How to Understand and Apply LLC Statutes in Drafting Operating Agreements”)

Task 21. Handle Mandatory Provisions in Governing LLC Act Relevant to Your Client’s Operating Agreement. Determine with your client how to handle in the client’s best interest in the client’s operating agreement each relevant mandatory provision in the governing LLC act. The operating agreement should not override any of these provisions.


2 In this outline, the term “business organization law” means the subset of state business law consisting of the statutory and common law governing the formation, operation, management and other non-tax features and procedures of business entities (including, for example, procedures for statutory mergers, conversions and dissolutions). Examples of state business organization law statutes include corporate statutes, LLC statutes, and general and limited partnership statutes.


CHECK BOX

TASK NUMBER


Task 22. Handle Default Provisions in the Governing LLC Act Relevant to Your Client’s Operating Agreement. Determine with your client how to handle in the client’s best interest in the client’s operating agreement each relevant default provision in the governing LLC act. Depending on the default provision in question, it may be critical either that the operating agreement address the provision or be purposefully silent about it.


Task 23. Handle Non-Self-Enabling Permissive Provisions in the Governing LLC Act Relevant to Your Client’s Operating Agreement. Determine with your client how to handle in the client’s best interest in the operating agreement each relevant non-self-enabling permissive provision in the governing LLC act.


Task 24. Handle Self-Enabling Provisions in the Governing LLC Act Relevant to Your Client’s Operating Agreement. Determine with your client how to handle in the client’s best interest in the operating agreement each relevant self-enabling permissive provision in the governing LLC act.

Chapter 17 (“How to Understand and Apply LLC Statutes in Drafting Operating agreements”)

Task 25. Handle Statutory Gap Issues in the Governing LLC Act Relevant to Your Client’s Operating Agreement. Determine with your client how to handle in the client’s best interest in the operating agreement all relevant statutory gap issues in the governing LLC act—i.e., issues that the governing LLC act ought to but does not address.


Task 26. Handle Case Law Issues Relevant to Your Client’s Operating Agreement. Identify all published cases relevant in drafting your client’s operating agreement, and determine with the client’s how to address each of these cases in the client’s best interest.

Chapter 5 (“Non-Delaware LLC Case Law”); Chapter 6 (“Delaware LLC Case Law”)

Task 27. Identify and Handle (or Work with Other Professionals to Handle) Estate Planning Issues and Other Legal and Tax Issues That Are Not LLC Business Organization Law or Tax Issues That Need to be Addressed in Your Client’s Operating Agreement. Identify and handle, to the extent of your competence, estate planning issues and other non-LLC legal and tax issues that need to be addressed in your client’s operating agreement but that are not addressed in the model operating agreement on which your client’s operating agreement is based; and, to the extent that you lack the necessary expertise, help your client to identify other professionals who can handle them.

Chapter 21 (“How to Identify and Handle LLC Formation Issues Not Addressed in LLC Forms”)

Task 28. Handle Federal Income Tax Drafting Issues Relevant to Your Client’s Operating Agreement. In planning the operating agreement for your client’s LLC, identify and plan how to handle in the client’s best interest all relevant federal income tax issues under the relevant federal income tax regimen. These may include, for example, issues under IRC Section 704(b) (concerning contributed property with built-in-gain) and other special allocation issues, such as profits interest issues.

Chapter 29 (“How to Draft Federal Income Tax Provisions for LLCs Taxable as Partnerships”); Chapter 30 (“How to Draft Federal Income Tax Provisions for LLCs Taxable as S Corporations”)


CHECK BOX

TASK NUMBER


Task 29. Handle Social Security Tax Drafting Issues Relevant to Your Client’s Operating Agreement. In planning the operating agreement for your client’s LLC, identify and plan how to handle in the client’s best interest all social security tax issues under the relevant federal income tax regimen. For example, if the relevant operating agreement is intended to reflect the Prop. Reg., it should contain special Prop. Reg. terms.

Chapter 30 (“How to Draft Federal Income Tax Provisions for LLCs Taxable as S Corporations”); Chapter 31 (“How to Protect LLC Members from the Self-Employment Tax”)

Task 30. Handle Multi-State Tax Issues Relevant to Your Client’s Operating Agreement. In planning the operating agreement for your client’s LLC, identify and plan how to handle in the client’s best interest all relevant state and multi-state tax issues under the relevant federal income tax regimen. In New Hampshire, these will include New Hampshire Interest and Dividends Tax issues.

Chapter 32 (“How to Handle State and Multistate Tax Issues in LLC Formations”)

Task 31. Write Planning Memo Concerning Client’s Operating Agreement. Write a planning memo for your client about the formation of the client’s LLC and about the client’s operating agreement and obtain the client’s comments on it. These memos summarize for clients in plain English the relevant fact and legal and tax issues and how to resolve these issues. You should not draft operating agreements until you obtain your clients’ approvals of these memos.

Chapter 23 (“How to Use Planning Memos in LLC Formations”)

Task 32. Prepare First Draft of Operating Agreement. On the basis of the above procedures,, prepare a first draft of the client’s operating agreement and obtain client’s comments on it.

Chapter 19 (“Drafting Operating Agreements for Multi-member LLCs--Understanding and Mastering the Drafting Process”); Chapter 19A (“Provision-by-Provision Commentary on Form 6.2”)

Task 33. Handle Negotiation of Your Client’s Operating Agreement. To the extent your client wishes, and on the basis of the above first draft, assist your client in negotiating the terms of the client’s operating agreement with the other prospective parties to the agreement.

Chapter 24 (“How to Finish the LLC Formation Process”), § 24.02 (“Negotiating the Operating Agreement”)

Task 34. Prepare Second and Final Drafts of Above Documents, Etc. Prepare second and final drafts of the above documents, obtain all necessary signatures on the final drafts, file the signed final version of the articles of organization with the secretary of state, and handle any other final procedures necessary in connection with forming your client’s LLC.

Chapter 24 (“How to Complete the LLC Formation Process—Negotiating Deals; Finalizing Documents; Preparing Minute Books”)

Task 35. Prepare Final Drafts of Above Documents. Draft final versions of the above documents, obtain all necessary signatures on them, file the signed final version of the articles of organization with the secretary of state, and handle any other procedures necessary in connection with forming your client’s LLC.


Task 36. File Formation Documents and Do All Other Things Necessary to Complete the Formation of the LLC. File the document—called “articles of organization” in many states—and make the payment to the relevant state agency—called the office of the Secretary of State in many states—to form the LLC; and follow up on these procedures as necessary.



CHECK BOX

TASK NUMBER


Task 37. Veil-Piercing. Address with your client all veil-piercing issues relevant to the client’s LLC. In any LLC formation, you should instruct your clients about how to minimize veil-piercing risks.

Chapter 22 (“How to Advise LLC Formation Clients about Veil-Piercing”) and exhibits to that chapter

Task 38. Prepare LLC Minute Book. If your client is willing to pay an appropriate fee, prepare and provide to your client a “minute book” of basic legal documents relating to the client’s LLC.

Chapter 24 (“How to Complete the LLC Formation Process—Negotiating Deals; Finalizing and Filing Documents; Preparing Minute Books”)

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SECTION 199A--TABLE OF CONTENTS OF FINAL REGULATIONS, AS ISSUED ON FEBRUARY 8, 2019

§1.199A-1 Operational rules.

§1.199A-2 Determination of W-2 Wages and unadjusted basis immediately after acquisition of qualified property.

§1.199A-3 Qualified business income, qualified REIT dividends, and qualified PTP income.

§1.199A-4 Aggregation.

§1.199A-5 Specified service trades or businesses and the trade or business of performing services as an employee.

§1.199A-6 Relevant passthrough entities (RPEs), publicly traded partnerships (PTPs), trusts, and estates.

________________________________________________________________________

§1.199A-1 Operational rules.

(a) Overview.

(1) In general.

(2) Usage of term individual.

(b) Definitions.

(1) Aggregated trade or business.

(2) Applicable percentage.

(3) Net capital gain.

(4) Phase-in range.

(5) Qualified business income (QBI).

(6) QBI component.

(7) Qualified PTP income.

(8) Qualified REIT dividends.

(9) Reduction amount.

(10) Relevant passthrough entity (RPE).

(11) Specified service trade or business (SSTB).

(12) Threshold amount.

(13) Total QBI amount.

(14) Trade or business.

(15) Unadjusted basis immediately after the acquisition of qualified property (UBIA of qualified property).

(16) W-2 Wages.

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(c) Computation of the section 199A deduction for individuals with taxable income not exceeding threshold amount.

(1) In general.

(2) Carryover rules.

(i) Negative total QBI amount.

(ii) Negative combined qualified REIT dividends/qualified PTP income.

(3) Examples.

(d) Computation of the section 199A deduction for individuals with taxable income above the threshold amount.

(1) In general.

(2) QBI component.

(i) SSTB exclusion.

(ii) Aggregated trade or business.

(iii) Netting and carryover.

(A) Netting.

(B) Carryover of negative total QBI amount.

(iv) QBI component calculation.

(A) General rule.

(B) Taxpayers with taxable income within phase-in range.

(3) Qualified REIT dividends/qualified PTP income component.

(i) In general.

(ii) SSTB exclusion.

(iii) Negative combined qualified REIT dividends/qualified PTP income.

(4) Examples.

(e) Special rules.

(1) Effect of deduction.

(2) Disregarded entities.

(3) Self-employment tax and net investment income tax.

(4) Commonwealth of Puerto Rico.

(5) Coordination with alternative minimum tax.

(6) Imposition of accuracy-related penalty on underpayments.

(7) Reduction for income received from cooperatives.

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(f) Effective/applicability date.

(1) General rule.

(2) Exception for non-calendar year RPE.

§1.199A-2 Determination of W-2 Wages and unadjusted basis immediately after acquisition of qualified property.

(a) Scope.

(1) In general.

(2) W-2 sages.

(3) UBIA of qualified property.

(i) In general.

(ii) UBIA of qualified property held by a partnership.

(iii) UBIA of qualified property held by an S corporation.

(iv) UBIA and section 743(b) basis adjustments.

(A) In general.

(B) Excess section 743(b) basis adjustments.

(C) Computation of partner’s share of UBIA with excess section 734(b) basis adjustments.

(D) Examples.

(b) W-2 wages.

(1) In general.

(2) Definition of W-2 wages.

(i) In general.

(ii) Wages paid by a person other than a common law employer.

(iii) Requirement that wages must be reported on return filed with the Social Security Administration.

(A) In general.

(B) Corrected return filed to correct a return that was filed within 60 days of the due date.

(C) Corrected return filed to correct a return that was filed later than 60 days after the due date.

(iv) Methods for calculating W-2 Wages.

(A) In general.

(B) Acquisition or disposition of a trade or business.

(1) In general.

(2) Acquisition or disposition.

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(C) Application in the case of a person with a short taxable year.

(1) In general.

(2) Short taxable year that does not include December 31.

(D) Remuneration paid for services performed in the Commonwealth of Puerto Rico.

(3) Allocation of wages to trades or businesses.

(4) Allocation of wages to QBI.

(5) Non-duplication rule.

(c) UBIA of qualified property.

(1) Qualified property.

(i) In general.

(ii) Improvements to qualified property.

(iii) Adjustments under sections 734(b) and 743(b).

(iv) Property acquired at end of year.

(2) Depreciable period.

(i) In general.

(ii) Additional first-year depreciation under section 168.

(iii) Qualified property acquired in transactions subject to section 1031 or section 1033.

(A) Replacement property received in a section 1031 or 1033 transaction.

(B) Other property received in a section 1031 or 1033 transaction.

(iv) Qualified property acquired in transactions subject to section 168(i)(7)(B).

(v) Excess section 743(b) basis adjustment.

(3) Unadjusted basis immediately after acquisition.

(i) In general.

(ii) Qualified property acquired in a like-kind exchange.

(A) In general.

(B) Excess boot.

(iii) Qualified property acquired pursuant to an involuntary conversion.

(A) In general.

(B) Excess boot.

(iv) Qualified property acquired in transactions described in section 168(i)(7)(B).

(v) Qualified property acquired from a decedent.

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(vi) Property acquired in a nonrecognition transaction with principal purpose of increasing UBIA.

(4) Examples.

(d) Effective/applicability date.

(1) General rule.

(2) Exceptions.

(i) Anti-abuse rules.

(ii) Non-calendar year RPE.

§1.199A-3 Qualified business income, qualified REIT dividends, and qualified PTP income.

(a) In general.

(b) Definition of qualified business income.

(1) In general.

(i) Section 751 gain.

(ii) Guaranteed payments for the use of capital.

(iii) Section 481 adjustments.

(iv) Previously disallowed losses

(v) Net operating losses.

(vi) Other deductions.

(2) Qualified items of income, gain, deduction, and loss.

(i) In general.

(ii) Items not taken into account.

(3) Commonwealth of Puerto Rico.

(4) Wages.

(5) Allocation of items among directly-conducted trades or businesses.

(c) Qualified REIT dividends and qualified PTP income.

(1) In general.

(2) Qualified REIT dividend.

(3) Qualified PTP income.

(i) In general.

(ii) Special rules.

(d) Reserved.

(e) Effective/applicability date.

(1) General rule.

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(2) Exceptions.



§1.199A-4 Aggregation.

(a) Scope and purpose.

(b) Aggregation rules.

(1) General rule.

(2) Operating rules.

(i) Individuals.

(ii) RPEs.

(c) Reporting and consistency.

(1) For individual.

(2) Individual disclosure.

(i) Required annual disclosure.

(ii) Failure to disclose.

(3) For RPEs.

(i) Required annual disclosure.

(ii) Failure to disclose.

(d) Examples.


(1) General rule.

(2) Exception for non-calendar year RPE.

§1.199A-5 Specified service trades or businesses and the trade or business of performing services as an employee.

(a) Scope and effect.

(1) Scope.

(2) Effect of being an SSTB.

(3) Trade or business of performing services as an employee.

(b) Definition of specified service trade or business.

(1) Listed SSTBs.

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(2) Additional rules for applying section 199A(d)(2) and paragraph (b) of this section.

(i) In general.

(A) No effect on other tax rules.

(B) Hedging transactions.

(ii) Meaning of services performed in the field of health.

(iii) Meaning of services performed in the field of law.

(iv) Meaning of services performed in the field of accounting.

(v) Meaning of services performed in the field of actuarial science.

(vi) Meaning of services performed in the field of performing arts.

(vii) Meaning of services performed in the field of consulting.

(viii) Meaning of services performed in the field of athletics.

(ix) Meaning of services performed in the field of financial services.

(x) Meaning of services performed in the field of brokerage services.

(xi) Meaning of the provision of services in investing and investment management.

(xii) Meaning of the provision of services in trading.

(xiii) Meaning of the provision of services in dealing.

(A) Dealing in securities.

(B) Dealing in commodities.

(1) Qualified active sale.

(2) Active conduct of a commodities business.

(3) Directly holds commodities as inventory or similar property.

(4) Directly incurs substantial expenses in the ordinary course.

(5) Significant activities for purposes of paragraph (b)(2)(xiii)(B)(4)(iii)

(C) Dealing in partnership interests.

(xiv) Meaning of trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.

(3) Examples.

(c) Special rules.

(1) De minimis rule.

(i) Gross receipts of $25 million or less.

(ii) Gross receipts of greater than $25 million.

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(2) Services or property provided to an SSTB.

(i) In general.

(ii) 50 percent or more common ownership.

(iii) Examples.

(d) Trade or business of performing services as an employee.

(1) In general.

(2) Employer’s Federal employment tax classification of employee immaterial.

(3) Presumption that former employees are still employees.

(i) Presumption.

(ii) Rebuttal of presumption.

(iii) Examples.


(1) General rule.

(2) Exceptions.



§1.199A-6 Relevant passthrough entities (RPEs), publicly traded partnerships (PTPs), trusts, and estates.

(a) Overview.

(b) Computational and reporting rules for RPEs.

(1) In general.

(2) Computational rules.

(3) Reporting rules for RPEs.

(i) Trade or business directly engaged in.

(ii) Other items.

(iii) Failure to report information.

(c) Computational and reporting rules for PTPs.

(1) Computational rules.

(2) Reporting rules.

(d) Application to trusts, estates, and beneficiaries.

(1) In general.

(2) Grantor trusts.

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(3) Non-grantor trusts and estates.

(i) Calculation at entity level.

(ii) Allocation among trust or estate and beneficiaries.

(iii) Reserved.

(iv) Threshold amount.

(v) Reserved.

(vi) Electing small business trusts.

(vii) Anti-abuse rule for creation of a trust to avoid exceeding the threshold amount.

(viii) Example.


(1) General rule.

(2) Exceptions.



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