Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Translating Corporate Concepts into the Language of LLCs
Robert P. Rothman*
*Senior Counsel to Akin Gump Strauss Hauer & Feld LLP, New York, New York,
where he practices in the area of federal income taxation.
As anyone who has ever tried to decipher an English-language instruction manual for a product made in China can attest, a literal translation of words from one language into another frequently does not result in an effective translation of content. Different languages have different grammatical structures, and a good translator needs to understand this and take this into account when preparing a translation that accurately reflects the meaning of the original text yet fits within the structure of the new language.Lawyers who advise privately held businesses, particularly at the start-up stage, face a similar problem. Since the mid-1990s, the entity of choice for many privately held businesses is the limited liability company (LLC). While most lawyers have become conversant with the use of LLCs, businesspeople have been slower to understand the way LLCs operate, and often negotiate deals based on the corporate model. Frequently, a lawyer receives a “term sheet” prepared by the principals to reflect the basic terms of an agreed upon deal, phrased in terms of shares of stock, options, and similar corporate concepts. Assuming the lawyer is able to persuade the principals that an LLC is the better entity to use, he is then faced with the task of implementing the deal in that form. While it is generally possible to match the economic effect of any corporate structure with a carefully crafted set of allocation and distribution provisions for an LLC, a literal translation is not always possible. The lawyer who attempts such a translation without considering the differences in structure and grammar between the two languages is likely to create a document that (1) does not accurately reflect the economic deal between the parties; (2) results in unforeseen adverse tax consequences to at least some parties; or (3) suffers from both problems. This Article addresses some of the differences between the “grammar” of corporations and LLCs, and some practical effects of those differences that a lawyer must face in his role as translator.