Why is the Partnership Representative so important?
The Partnership Representative has broad powers to obligate the LLC or LP. Any resolution they arrive at with the IRS binds all of the partners. You want to have the right person in place for this. If you don’ t appoint such a person, the IRS can appoint someone for you. You don’ t want the IRS to have such a power over your entity. This is a key reason why LLC Operating Agreements and LP Limited Partnership Agreements must be amended to preappoint a Partnership Representative.
Who can be the Partnership Representative?
The Partnership Representative must be an individual with a substantial presence in the United States. Initially, we typically appoint a General Partner of an LP or a Manager / Member of an LLC to fill this role. If the IRS later conducts an audit, a CPA or tax lawyer, who does not have to be a Partner or Member, can be appointed if desired. A professional firm can serve in this role but an individual with a substantial U. S. presence must also be identified. Again, if you don’ t appoint one, the IRS can do it for you, which is not in your best interest.
Can I opt out of these new rules?
Yes – but we don’ t suggest it. Partnerships with no more than 100 eligible partners( and not one ineligible partner) can opt out and be governed by the old rules. However, ineligible partners include single member LLCs and living trusts. Virtually all of our clients currently or in the future will use a single member Wyoming LLC and / or a revocable living trust for their asset protection and estate planning goals. These strategies involve ineligible partners.
If you opt out and a single member LLC or a living trust becomes a partner then you are back into the new rules. But because you didn’ t amend your documents and appoint a Partnership Representative, the IRS now gets to pick one for you. You don’ t want to give them such power.
New IRS Rules for LLCs and LPs Taxed As Partnerships