Article XI – Tax Matters

Deep Dive: Article XI – Tax Matters

Section 11.01 – Financial Statements

Each Fiscal Year (or other period), the Company must provide each Member with financial statements “prepared on the basis of tax basis accounting or other methods reasonably determined by the Members.”

Pros

• Ensures every Member sees the numbers used for allocations and distributions.
• Flexibility to choose the most appropriate accounting method.

Cons

• No required frequency or delivery deadline—Members could wait months.
• “Reasonably determined” is vague, enabling debate over method changes without Member input.

Structural Risk

• Lack of timing and format standards can hinder Members’ ability to plan taxes or cash needs.

Section 11.02 – Inspection Rights

Upon reasonable notice, any Member (and its advisors) can review:

• Company properties, offices, facilities (but more than one visit per year needs Manager approval)
• Corporate, financial and similar records
• Company employees and accountants

Pros

• Empowers Members to audit books, meet with accountants, and validate operations.

Cons

• Managers can limit inspections to once a year, blocking deeper dives when issues arise.
• Members bear their own expenses plus reasonable Company costs, raising barriers to frequent reviews.

Structural Risk

• “Reasonable notice” and cost-recovery provisions can be used to stonewall scrutiny.

Section 11.03 – Income Tax Status

The Company and Members must treat the LLC as a partnership for federal, state and local income tax purposes. No election to be taxed as a corporation is allowed.

Pros

• Alignment with expected pass-through treatment avoids double taxation.
• Prevents surprise IRS recoding as a corporate entity.

Cons

• None substantial—this is standard for a multi-member LLC.

Section 11.04 – Tax Matters Representative (TMR)

• PV Legacy Investment, LP is appointed TMR; removal by Members holding 90% of Interests.
• TMR has sole authority to handle all IRS examinations, decide whether to contest audits, and make partnership-level elections.
• The Company elects out of the IRS Partnership Audit Rules where permitted, or uses the “alternative procedure” when needed.
• The TMR’s decisions bind the Company and all Members.

Pros

• Centralizes audit-related decisions in one representative for consistency.
• Opt-out election protects Members from the centralized IRS assessment regime.

Cons

• PV Legacy controls the TMR role and can steer audits to its advantage.
• TMR can make binding decisions—like contesting a deficiency—that Members may disagree with.
• Members have no right to approve or veto audit strategies or elections.

Structural Risk

• Concentrated power over tax outcomes with no requirement to inform or obtain consent from other Members.

Section 11.05 – Tax Returns

Managers must cause the preparation and timely filing of all partnership tax returns, then deliver each Member a Schedule K-1 and other necessary info “as soon as reasonably possible after the end of each Fiscal Year.”

Pros

• Puts filing responsibility on the Managers, not individual Members.

Cons

• “As soon as reasonably possible” is undefined—could slip past tax deadlines for issuing K-1s, leaving Members scrambling.

Structural Risk

• Late K-1s can trigger penalties, interest, and Members’ cash-flow issues when they must pay taxes without accurate numbers.

Section 11.06 – Company Funds

All Company funds must be held in Company-named accounts or investments. Withdrawals require Manager signatures.

Pros

• Prevents commingling of Company and personal funds.

Cons

• No requirement for dual-signatures on distributions or advances—one Manager could unilaterally drain cash.

Structural Risk

• Single-signatory control over cash increases risk of misappropriation or surprise distributions.