Florida’s new LLC Act (“New LLC Act”) has created a real “buzz” in the legal community. Of particular concern to many practitioners are provisions of the New LLC Act which allow a member of a Florida LLC to “dissociate” (i.e., withdraw) from the LLC at any time in which event the dissociating member will continue to receive distributions from the LLC. This right of dissociation cannot be taken away from the member.
Under prior law, a member could not withdraw from the LLC prior to its dissolution or winding up unless the operating agreement expressly gave the member that right. In addition, under prior law, the withdrawing member was entitled to receive from the LLC an amount equal to the fair value of the withdrawing member’s interest in the LLC, unless the operating agreement provided a different distribution right.
In a recent blog by our corporate partner, Morrie Brown, he discussed the “dissociation” provisions of the New LLC Act and, in particular, certain issues/uncertainties raised by these new provisions. This blog will highlight certain income and estate tax issues created by the new “dissociation” provisions of the New LLC Act.
The prior LLC law afforded members the flexibility to structure the taxable sale of a membership interest in a Florida LLC either with a maximum valuation discount (in which case the right to withdraw from the LLC was eliminated) or as a “stepped-up tax basis” transaction without any valuation discount (in which case the right to withdraw from the LLC was included). An example of the latter transaction is an installment sale of a membership interest to a non-grantor trust in a fully-taxable transaction with a certain tax election in place, allowing the grantor trust to get a stepped-up inside tax basis in the property held by the LLC.
Under the New LLC Act, you still may be able to structure a taxable sale of a Florida membership interest and obtain a maximum valuation discount, since the right to dissociate does not entitle the dissociating member to receive fair value for the member’s interest. However, if you wish to structure the taxable sale as a “stepped-up tax basis” transaction, without discount, you may not simply rely on the default provisions under the New LLC Act. Instead, the operating agreement will need to contain express language expanding the dissociating member’s rights to include the right to receive fair value for its interest in the LLC.
Florida LLC members need to consider the “dissociation” provisions under the New LLC Act when formulating estate and income tax planning transactions.