A partnership agreement basically outlines the points of action, responsibilities and rights of the owners involved in it. This involves details such as stake, percentage of ownership, distribution benefits, etc. Whether you are dealing with individuals in a partnership or a Limited Liability Corporation (LLC) filing a federal level partnership return, there are couples of reasons for you to consider amending your agreement to keep it on par with current laws. Let’s have a look at some of them!
Contact us if you have any of the situations below in 2018 or beyond as tax laws have changed. We are a full service CPA firm that help you tackle partnership issues.
The first one is the apparent one where there is a change in partners that involves either a partner exiting the agreement or a new partner taking it up. Amendment is necessary to represent the change of roles in the business and any other changes you may want to throw in with the evolving nature of your business.
Joining or splitting partnerships
Another reason that warrants a modification of the existing agreement or drafting a new one is when partnerships morph by merging with other partnerships or getting split depending on the requirements of your business.
Changes to mode of business operation
Don’t forget to make the necessary amendments if you are changing your business’s operational strategy. This could entail a change in your accounting methods or a transfer to a new banking institution among others operational changes.
Audit reforms – tax preparation
From 2018, with the Tax reforms, new rules apply for partnership level audits that are conducted that analyze and determine the pending payments towards the partnership. There are of course exceptions involving groups that can opt out of these rules such as:
- Partnerships with equal to or less than 100 individual partners
- Select foreign entities
- S Corporations
For those that are held to the rules, the following information needs to be reflected in the partnership agreement as amendments:
- Procedure to decided whether to stay or opt out of the amendments with 100 or fewer partners involved
- Procedure to file partnership level federal tax returns
- Who represents the partnership and how the said person is elected or removed (Note: This person doesn’t necessarily need to be partner)
Change in business entity (like an S Corp)
Finally, if the nature of the partnership itself changes from that of individuals in partnership to an LLC (to benefit partners by protecting their personal liabilities), the method of accounting and how tax returns are filed changes. Depending on the nature of this change, the agreement may require to be modified or a whole new agreement may need to be drawn up. Let’s look at a few such change scenarios:
- The initial conversion to an LLC requires that a new partnership agreement be drawn up
- Depending on how an LLC wants to be taxed, certain amendments may be required. For example, an LLC may want to be taxed as a S corporation so that the owners can earn wages. In addition to this, the premiums paid towards the S Corporation Shareholders Health Insurance are deductible and can be reported as wages on the shareholder’s W-2 return filing. This means no Medicaid taxes apply on these amounts.
Professional review of your tax strategies
If you are part of a partnership, it’s important to have your current agreement reviewed by your tax and financial advisors and conclude with your partners as to the necessary changes. Remember to work with your attorney to draft the changes or the new agreement to reflect your business and personal intent.