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Family Business: Mergers of Partnerships

In any successful family business, there will likely be a time when descendants will want to take over from the older generation of homeowners. Usually, this will require that entities be split into different business entities to account for differences between descendants (descendants may not be able to cooperate) or risk management, in order to separate high risk activities from lower risks. . business and investment (construction activities must be separated from investment assets such as equities, bonds, annuity assets.)

As part of the restructuring of companies that are partnerships, the restructuring may take the form of taxable restructurings or non-tax restructurings. A simple winding up of a partnership that distributes assets or liabilities, or both, and the formation of one or more partnerships will likely result in a partner-level income tax. However, there is a procedure that would make this transaction tax-free if the conditions are met.

There are two main partnership restructuring procedures that are commonly referred to as "Assets Plus" and "Assets Plus" and a rarely used third is "Interest Plus". The "Active Plus" procedure generally does not generate any taxable income and is therefore usually the default form of the partnership merger, whenever the form of the merger does not specifically follow the asset form because it generally provides for favorable tax treatment for taxpayers and the government. In general, he will follow the procedures of the state and none of the partners actually owns the assets of the partnerships.

The "Assets completed" form distributes assets to its partners, who then contribute these assets to a profitable partnership. These transfers are likely to trigger taxable income, among other unpleasant collateral consequences. In addition, the assets transferred may be difficult to determine in and out of the transferred assets, especially if there are liabilities involved. It is hard to see why the parties would want to use this form, unless there are significant increases in corporate assets, most likely because the partners had bought interest when it did not happen. there was no election at §754 partnership interest) in force.

If partners instead bring their partnership interests into another partnership (Interest Over), the IRS can restructure the transaction as an "Assets Over" form.

All of these transactions have complex collateral consequences with respect to the internal and external basis, the recovery of amortization, liabilities and the increase or decrease in assets. When associates transfer their interest in a company ("Interest Up Form") and the result is a mix of the two previous theories on mergers of partnerships. A competent and experienced lawyer should be consulted.

Got a question? Contact Brett Thompson. Your comments are always welcome!

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