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Financial Statement & Tax Return
 Considerations For
Limited Liability Companies
By ProGuide™


NEW - COMING 2011!

ProForms™ 2011 - Legal Forms - CD
By ProGuide - Practically A Complete
Business "Law Office On A Disk"™

  • a great business law forms collection in its own right

  • a "must have" supplement to your current legal forms collection

  • inexpensive and it will save you time & money

ProGuide™ - Legal Forms is pleased to make these continuing legal education materials available to you. However, please note that while still quite useful, portions of the materials discuss issues which have been clarified by the "check_a_box" and other regulations subsequently adopted by the Internal Revenue Service. Thus, the materials, as set forth, should not be relied upon as reflecting the current state of the law and great care should be used to ensure that all legal references and all conclusions reached are still correct and have not been rendered obsolete by statutes, regulations, rulings and other pronouncements of the Internal Revenue Service, the courts, and various state agencies.

Use of these materials
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               I.   To prepare tax returns or financial statements for

                    an LLC or its members, the preparer should first

                    establish whether the entity actually was created

                    and whether it is a member managed or manager

                    managed LLC.

                    A.   Obtain copies of at least the following:

                         1.   Articles of Organization

                         2.   Operating Agreement, if any

                              a.   If none, get a representation to that


                         3.   Other agreements existing between the


                    B.   Note whether there are any payments required to

                         be made to or from any members - eg. additional

                         contributions or declared distributions.

                    C.   Note how the "value" of each member's interest

                         which is required to be maintained in the

                         records compares with those of the other

                         members.  See how profit and loss allocations

                         compare with the relative "value" of each

                         member and ascertain the basis for

                         substantially different allocations.

                    D.   If the "value" is substantially different than

                         those on the books, ascertain whether a IRC 754

                         election can or should be made.

               II.  Additional information should also be obtained which

                    will assist in determining the tax classification of

                    the entity for federal and state tax purposes:

                    A.   Private Letter Ruling from IRS

                    B.   Opinion of Legal Counsel

                    C.   Other agreements between the members regarding

                         voting, control, options to purchase, approval

                         of continuation, and anything else pertaining

                         to the transfer of the interests, or continuity

                         of life, or centralized management

                         1.   Ascertain who all the members are and what

                              their relationship is to each other - is

                              there control or a family relationship?

                    If the entity is taxed as a corporation, appropriate

                    returns must be filed and tax liabilities accrued.

               III. Ascertain how LLCs and their members are taxed in

                    all of the states in which the LLC operates.

                    A.   determine if there is any entity level tax due

                    B.   ascertain that state's rules regarding the

                         sourcing of income

                    C.   ascertain whether there has been or should be

                         any withholding

                    D.   accrue any entity level tax liability

                    E.   if the member must pay the tax and the member

                         is the client, accrue the proper liabilities

               IV.  Ascertain the nature of the businesses in which the

                    LLC is engaged and the level of participation which

                    each member has with regard to the activity.

                    Consider how they impact on:

                    A.   passive loss rule considerations

                    B.   treatment as a tax shelter, farm syndicate, or

                         other syndicate

                         1.   may not be able to use cash method of

                              accounting for tax purposes

                              a.   remember, you can not change methods

                                   of accounting without consent of the

                                   IRS even if changing from an

                                   incorrect to a correct method

                         2.   status as a limited partner, general

                              partner, or limited entrepreneur

               V.   Ascertain what states the LLC operates in and

                    whether those states have LLC statutes.

                         1.   If there is a state in which the LLC

                              operates which does not have an LLC

                              statute, ascertain whether anything has

                              occurred which might give rise to a

                              material or unusual liability

               VI.  Consider a financial statement disclosure regarding:

                    A.   the entity's or member's obligation to pay


                    B.   anticipated or acknowledged withdrawals needed

                         to pay taxes or other items

                    C.   any actual withdrawals since the balance sheet


                    D.   significant differences between book and tax

                         accounting income - regardless of who pays the


                         1.   consider disclosing deferred taxes

                    E.   significant differences in value of assets on

                         books and adjusted basis in assets for tax


                         1.   ascertain whether any special IRC 704(c)

                              allocation must be made because of a

                              contribution of property having a basis

                              which is lower than fair market value

                    F.   member equity; consider proper labels; consider

                         whether any difference in descriptions would be

                         helpful if the LLC issued certificates

                    G.   manager members' investments

                    H.   interests held by unapproved assignees

                    I.   any change in the tax status of the entity

               VII. If the entity, which is now an LLC, was converted

                    from a partnership or other form of entity,


                    A.   APB 20 regarding the restatement of financial

                         statements -- changes in the legal form of the

                         entity do not ordinarily permit or require the

                         restatement of the financial statements.

                         1.   The format of comparative statements may,

                              however, need to be changed to allow more

                              meaningful comparison.

                              a.   such changes should be disclosed.

                    B.   disclosing the change in the legal form of the


               VIII.     Financial Statement Presentation of the

                         Investment In An LLC

                    A.   An investment in an LLC will effect the balance

                         sheet of the investor.

                    B.   GAAP requires that minority investments in

                         corporations be reflected equity method of


                         1.   This method reflects the net investment in

                              the entity in which the investment has

                              been made

                              a.   amount is adjusted up or down

                                   depending upon the profitability of

                                   the investment

                                   (1)  impact on financial statement is

                                        usually not significant

                    C.   If investor has sufficient ownership interests

                         in a corporation (usually greater than 50% of

                         the votes), consolidated financial statements

                         are required and the equity method is not used.

                         1.   all of the assets and liabilities of the

                              related entity are shown on the balance

                              sheet of investing entity.

                              a.   reflecting assets and liabilities in

                                   this way can impact cause a

                                   significant impact on financial


                                   (1)  could adversely affect bank


                                   (2)  could adversely licensing -eg.

                                        Department of Ag. milk buyer


                    D.   Because LLC's are new, proper method is


                         1.   May be effected by member managed status

                              or manager managed status and level of

                              actual control if member managed but

                              subject to a binding contractual agreement

                              not to exercise management rights.

                         2.   Also note, in some situations general

                              partners must report partnership recourse


                              a.   this adversely impacts the general

                                   partner's balance sheet

                              b.   use of an LLC can prevent inclusion

                                   of these liabilities

               IX.  Miscellaneous Observations & Reminders

                    A.   Note that a change in the "value" of the

                         member's relative values in the entity, as

                         shown in the records required to be kept has

                         several effects.  Some of them are:

                         1.   if there is no operating agreement, the

                              change affects the voting rights of the

                              members, profit and loss allocations,

                              distribution and liquidation rights.

                              a.   Thus, changes can have the affect of

                                   shifting capital of the entity and

                                   changing the allocable share of each

                                   member's debt.  For tax purposes,

                                   gain or loss may be realized and

                                   recognized as a result of such


                    B.   Some Portions of the Wisconsin LLC Statute

                         Directly Pertaining to Accountants are:

                         1.   183.0607, Limitations on Distribution,

                              provides that there are limitations on

                              distributions from an LLC under

                              circumstances where the LLC will be

                              insolvent, etc.  The statute provides

                              specifically that:

                              (2) A LLC may base a determination that a

                              distribution is not prohibited by sub. (1)

                              on any of the following:

                                   (a) Financial statements and other

                                   financial data prepared on the basis

                                   of accounting practices and

                                   principles that are reasonable under

                                   the circumstances.

                              So accountant should make sure statement

                              is sufficiently clear to avoid confusion

                              and potential negligence resulting in a

                              wrongful distribution.

                         2.   Wis. Stat.183.0706(2) & 183.0405,

                              pertaining to an assignee's becoming a

                              member and being liable for all of the

                              debts of the assignor to the extent that

                              they were ascertainable from the records

                              required t be maintained by the LLC -

                              which includes financial statements.

                              a.   Accountants must make sure that

                                   financials are complete, including

                                   disclosures, or that limitations

                                   apply and that they should not be

                                   relied upon.

                              b.   If non-disclosed liability exists,

                                   accountant may get in middle of the

                                   fight between the assignee and the

                                   LLC over what should have been known

                                   or disclosed.

               X.   Audit Letters and Attorneys Responses

                    A.   Accountants, through there standard audit

                         letter, will seek disclosure of facts from

                         accountants regarding the tax classification of

                         the entity as well as information pertaining to

                         many of the other issues set forth above.

                    B.   Attorneys, on the other hand, will not wish to

                         disclose the information, if it is not

                         generally known, because disclosure may cause

                         the loss of the attorney-client privilege.

                         Furthermore, disclosure, while in the

                         accountants best interest, may not be in the

                         best interest so the client.

                    C.   While this conflict exists with regard to all

                         kinds of issues on a regular basis, the factual

                         nature of some of the inquiries and the

                         uncertain law will require more than average

                         cooperation between accountants and attorneys

                         if the client's need are to be served and their

                         rights protected.

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