Various limited liability entities can protect your oil and gas interests. For instance, Limited partnerships or limited liability companies can protect your oil and gas interests by contractually limiting the management and succession principles by use of the partnership agreements.
Interest holders can detail what duties are to be done by the manager or general partner during the interest-holders lifetime as well as dictate to whom those duties will fall once the interest-holder passes away. This can protect your oil and gas interests from acquisition by non-family members.
Additionally, the partnership agreements can dictate who can and cannot purchase a share of the mineral interests by limiting the participation in the partnership to family members or even specific family members. Buy-sell restrictions allow the ownership interests in family partnerships to avoid dilution, in turn resulting in a concentrated pool of mineral interest owners. Such restrictions can dictate that interests are to be sold only to family members, other trusts, and can even address the possibility of divorce or death in the family. The type of interests transferred can also be controlled, a direct corollary to the value of the transferred asset.
The partnership agreement can require capital contributions from the partners to be used for payment of operating expenses and taxes. The agreement can dictate that a minimum distribution be made annually to recover the capital contributions, especially important in investments where the goal is to reinvest profit in order to expand partnership assets.
Placing interests in a limited liability entity also protects mineral interest holders from liabilities arising from any economic interest held as well as shielding the interest from potential interference arising from an individual circumstances. However it is important to carefully review and follow subchapter K of the Internal Revenue Code when creating a limited liability entity to hold oil and gas interests.
Some, but not all, ownership interests can expense or capitalize intangible drilling costs. However, working interest holders may be subject to additional tax liability, which is limited by the limited liability entity. Someone needs to analyze whether it is best to hold interests through the limited liability entity or to expense or capitalize intangible drilling costs on a case-by-case basis.
Interest holders interested in creating a limited liability entity should discuss with a professional the options when accounting for and allocating depletion of oil and gas property, recapture of intangible drilling costs and depletion, and the associated tax limitations and liabilities for the partners under the Internal Revenue Code. It is recommended that the partnership communicate relevant information to the partners and that all work with an accounting firm to assist in the process. The Spencer Law Firm can also assist you to develop and protect your oil and gas interests.
Ashley Spencer is a licensed attorney with The Spencer Law Firm. The information in this blog is not intended as legal advice but to provide a general understanding of this legal subject. Readers with legal problems should consult an attorney for advice on their particular situation. The Spencer Law Firm offers legal consultation. Please email or call toll free at 1-800- 237-4529.