Structuring Waterfall Provisions in LLC and Partnership Agreements

Navigating Complex Distribution Structures, Minimizing Negative Tax Consequences

Recording of a 90-minute CLE/CPE webinar with Q&A


Conducted on Wednesday, April 19, 2017

Recorded event now available

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Program Materials

This CLE/CPE webinar will provide guidance to corporate and tax counsel on the various methods of structuring waterfall distribution provisions in LLC and partnership agreements. The panel will examine a variety of economic and tax considerations in the provisions, such as approaches to drafting priority returns (internal rate of return vs. preferred return, compounding, time value of money and the use of Excel references), relationships between distribution and allocation provisions, tax distributions, profits interests, and liquidation provisions.

Description

In LLC and partnership agreements, the waterfall provisions are heavily negotiated clauses that describe the priority in which distributions of cash and assets will be distributed among the entity’s members and partners.

The sequential order of the waterfalls is critical to ensuring the waterfall provisions work as intended and the distributions conform with the substance of the deal among the partners. Structuring waterfall provisions requires an understanding of payment priorities, economic terms and tax implications.

Counsel drafting and negotiating waterfall distribution provisions must ensure that the clauses are consistent with the economic arrangement of the parties. But, they must also ensure that the waterfall provisions are consistent with the partnership tax allocation provisions to avoid adverse tax consequences for the entity and its members or partners.

Listen as our authoritative panel discusses considerations and best practices for structuring waterfall provisions in LLC and partnership agreements, including the economic and tax impact of the clauses.

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Outline

  1. Waterfall provisions, generally
  2. Determining/drafting waterfall provisions
  3. Understanding economic arrangement of parties
    1. Addressing tax considerations
    2. Specific waterfall considerations
  4. Priority returns
    1. Different waterfalls for different events (cash-flow vs. capital proceeds)
    2. Tax distributions
    3. Liquidation provisions
    4. Effects of capital contributions
    5. Profits interests
    6. Capital shifts
  5. Tailoring tax provisions to waterfalls
    1. Economic importance of allocations
    2. Addressing initial capital accounts
    3. “Layer-cake” allocations
    4. “Target” allocations
    5. Gross vs. net allocations

Benefits

The panel will review these and other key issues:

  • What are the different types of waterfall provisions and when should each be used?
  • What are the key considerations and best practices for counsel drafting and negotiating waterfall provisions in LLC or partnership agreements?
  • What are some pitfalls to avoid when tailoring partnership allocation provisions to waterfall provisions?

Faculty

Beyzaee, Afshin
Afshin Beyzaee

Partner
Liner

Mr. Beyzaee heads his firm's tax practice and is also a member of the firm's corporate department....  |  Read More

Kiely, Michael
Michael J. Kiely

Partner
Liner

Mr. Kiely's legal practice spans all areas of real estate, including finance, development, and land...  |  Read More

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Strafford will process CLE credit for one person on each recording. All formats include program handouts. To find out which recorded format will provide the best CLE option, select your state:

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