New Hampshire multi-member LLCs provide powerful legal and tax structures for their members and their businesses. These structures can enable the members to provide products and services to their customers that they could never otherwise provide and to earn income they could never otherwise earn.

Unfortunately, however, many New Hampshire multi-member LLCs are also business divorces waiting to happen. Chamber of commerce statistics indicate that 18% of them fail within one year and 50% within five years.

The key documents that can prevent these failures are multi-member LLC operating agreements — the agreements that define LLC business and tax structures and LLC member and manager legal rights and duties.

However, it is critical that persons forming multi-member LLCs and members of existing multi-member LLCs ensure that their operating agreements meet high standards of competence. Multi-member LLC operating agreements will meet these standards if they properly address the twelve key legal and tax issues listed below. If you are an LLC founder or member, make sure that your operating agreement properly addresses all twelve. If it doesn’t, amend it ASAP. In my experience, a substantial majority of New Hampshire multi-member LLC operating agreements don’t meet this requirement.

Who are the members? Obviously, the operating agreements of multi-member LLCs should clearly identify each LLC member. The number of LLC lawsuits that focus on precisely this issue is incredible.

Member contributions to their LLC; capital accounts. Multi-member LLC operating agreements should state and precisely value the cash contributions and the contributions of property and services that the members must make to their LLCs in exchange for their memberships. In addition, if these LLCs are taxable as partnerships, multi-member LLC operating agreements should state the dollar value of the capital accounts of each of the members as of the date of formation. Capital accounts are the members’ respective shares of their LLCs’ aggregate dollar value.

Members’ shares of LLC income and losses. Multi-member LLC operating agreements should state how the members will share in the income and losses of their LLCs, and they should state the members’ rights, if any, to LLC salaries and bonuses.

Member’s fiduciary duties, etc. Multi-member LLC operating agreements should state the fiduciary and other duties of each LLC member and manager, and, to the extent appropriate, they should eliminate these duties.

Events of dissociation and their consequences. Multi-member LLC operating agreements should state the “events of dissociation,” such as resignation and death, whose occurrence will terminate the memberships of the members, and they should state the consequences of each of these events for each of the members, such as cash buyouts.

Member voting rights. Multi-member LLC operating agreements should set forth the voting rights of each of the members, and they should state which LLC matters must be decided by the members and which by the managers.

Membership transfers. Multi-member LLC operating agreements should set forth the requirements governing the members’ sales and other transfers of their memberships, including consent requirements.

Member dispute resolution. Multi-member LLC operating agreements should provide a clear and practical method for resolving disputes among the members.

Federal income taxation. Multi-member LLC operating agreements should state the federal income tax regimen applicable to the LLCs they govern and to their members. Most multi-member LLCs should be taxable as partnerships under Internal Revenue Code Subchapter K, and, to avoid negative IRS audits, they should contain several key partnership tax provisions. But a few should be taxable as C or S corporations.

IRC Section 199A. Multi-member LLC operating agreements should contain provisions that maximize the 20% annual federal income tax deduction potentially available to the members under IRC section 199A. This will often require provisions stating that the members will be compensated for their LLC services not with salaries but with distributions.

Federal Self-Employment Tax. Under an IRS regulation designated Proposed Regulation § 1.1402(a)-2, multi-member LLCs should, to the extent possible, minimize the Self-Employment Tax liabilities of the members. For 2023, the SET liability of most individuals on the first $160,200 of their “earned income” from their LLCs will be $24,510.60.

New Hampshire Interest and Dividends Tax. Through compliance with the relevant New Hampshire Interest and Dividends Tax regulations, multi-member LLCs should protect members residing in New Hampshire from liability for the 5% tax they may otherwise owe under that tax on their LLC income.

John Cunningham is a lawyer licensed to practice law in New Hampshire and Massachusetts. He is of counsel to the law firm of McLane Middleton, P.A. Contact him at 856-7172 or lawjmc@comcast.net. His website is llc199a.com. For access to all of his Law in the Marketplace columns, visit concordmonitor.com.

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