Partnership liquidating distribution detailed example

Posted by / 13-Nov-2017 11:37

Sometimes partnerships will have enough cash to pay off their liabilities, but in bankruptcy situations partnerships most often don't.

If there any assets remaining after all the liabilities are paid off, these assets are distributed to the partners based on their capital accounts.

This was more of a “cash follows tax” approach, in which the operating agreement provided a calculation for the allocation of taxable income/loss and distributions were then made based on the balance of the each partner’s capital account.

The Regulation provides a safe harbor for economic effect if:1.

Taxable income/loss is allocated so that, after the income/loss allocation has been made, the balance in each partner’s capital account shall, to the extent that is possible, be equal to an amount that would be distributed to the partner based on a hypothetical liquidation of the partnership.

Distributions are made based on the waterfall calculation.

With this method, the partnership makes distributions based up on the liquidation provisions of the operating agreement (usually referred to as the “waterfall”).Partnership liquidation is the process of closing the partnership and distributing its assets.Many times partners choose to dissolve and liquidate their partnerships to start new ventures.What if the parties wish to reward the service-provider for his or her services rendered to the partnership/LLC prior to the granting of the profits interest by allowing the service-provider to share in the Hurdle Amount?Can this be done without creating adverse tax consequences for the service-provider?

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