December 22, 2014

ARTICLE IN CCH TAX NEWSLETTER CONCERNING REVISED UNIFORM LIMITED LIABILITY COMPANY ACT

Revised Uniform Limited Liability Company Act Gains Momentum

1)The Revised Uniform Limited Liability Company Act (RULLCA), a revision of the Uniform Limited Liability Company Act of 1996 (ULLCA), was promulgated by the Uniform Law Commission in 2006. Although initially state legislatures were slow to adopt it, the RULLCA has been enacted or introduced in a growing number of states in recent years. This article provides background on the RULLCA, summarizes some key features of the model law, and provides an overview of the states that have enacted or will enact the RULLCA.

2)The limited liability company (LLC) is a relatively new entity type. Introduced in Wyoming in 1977, LLCs gained acceptance after the IRS ruled in Rev. Rul. 88-76, 1988-2 CB 360, that a Wyoming LLC was classified for federal tax purposes as a partnership. One advantage of the LLC form of organization is that it provides a liability shield to its owners (which previously was available only in the corporate form) while retaining the pass-through tax treatment of a partnership.

3)After Rev. Rul. 88-76, states quickly adopted their own LLC statutes, with varying rules and structure depending on the jurisdiction. In response, the ULLCA was promulgated by the Uniform Law Commission in 1995. It was amended in 1996 in response to the check-the-box entity classification regulations under Code Sec. 7701. Under those regulations, an LLC created or organized in the United States with more than one member is treated as a partnership unless it elects to be taxed as a corporation, and an LLC with one member is a disregarded entity unless it elects to be taxed as a corporation.

4)The 2006 RULLCA provides states an opportunity to replace their current LLC statute with, in the words of the Uniform Law Commission, a “comprehensive, fully integrated ‘second generation’ LLC statute that takes into account the best elements of the ‘first generation’ LLC statutes and two decades of legal developments in the field.”

5)The RULLCA’s noteworthy provisions concern:

  • The operating agreement. The RULLCA operating agreement provisions were revised to better delineate the operating agreement’s ability to alter or eliminate aspects of fiduciary duty and to expressly authorize relief from liability for money damages arising from member or manager breach of duty.
  • Shelf registrations. The RULLCA permits pre-filing a certificate of organization before the LLC has admitted any members.
  • No statutory apparent authority. The RULLCA provides that a member is not an agent of the LLC solely by reason of being a member.
  • Management structure. The RULLCA retains the default rule of member-managed LLCs and permits the operating agreement to provide for a manager-managed LLC structure.
  • Charging orders. The RULLCA continues the charging order mechanism with modernized language.
  • Remedy for oppressive conduct. Given the default rule of perpetual duration for LLCs and the elimination of a put right under the ULLCA, the RULLCA permits a member (but not a transferee) to seek a court order dissolving the LLC on grounds of oppressive conduct.
  • Derivative claims and special litigation committees. The RULLCA contains modern provisions addressing derivative litigation and authorizes special litigation committees.
  • Mergers, conversions and domestications. The RULLCA permits these transactions, including “inter-species” transactions.

6)Also worth mentioning is what the RULLCA does not provide; specifically, it does not authorize series LLCs. Series LLCs—allowed in several states, including Delaware—are formed by a single LLC, with each series treated as a separate enterprise with its own specified members, assets, and obligations. With questions as to the overall legal status of series LLCs, including their tax treatment, the Uniform Law Commission did not endorse series LLCs in the RULLCA.

Comment

7)Since the promulgation of the RULLCA in 2006, the IRS has issued proposed regulations (Prop. Reg. §301.7701-1(a)(5), in NPRM REG-119921-09), effective when published as final, providing that each series of a series LLC would be treated for federal tax purposes as a separate entity formed under local law, regardless of whether local law actually treats the series as a separate entity.

8)The following table summarizes the states that to date have adopted or introduced the RULLCA:

State / Revised Act Effective Date / Transition Provisions / Revised Act Applies To All LLCs As Of:
Alabama / January 1, 2015 / From 1-1-2015 to 1-1-2017, apply only to LLCs formed after 1-1-2015 and to electing earlier-formed LLCs. / January 1, 2017
California / January 1, 2014 / Apply to all domestic LLCs existing on/after 1-1-2014, all foreign LLCs registered before 1-1-2014 whose registrations have not been cancelled as of that date, all foreign LLCs registered on/after 1-1-2014, and to all actions by managers or members on/after 1-1-2014. Prior act governs all acts or transactions occurring, or contracts entered into by the LLC or by its members or managers, before 1-1-2014. / January 1, 2014
District of Columbia / January 1, 2012 / From 1-1-2012 to 1-1-2013, applied only to LLCs formed after 7-2-2011 and to electing earlier-formed LLCs. / January 1, 2013
Florida / January 1, 2014 / From 1-1-2014 to 1-1-2015, apply only to LLCs formed on or after 1-1-2014 and electing earlier-formed LLCs. / January 1, 2015
Idaho / July 1, 2008 / From 7-1-2008 to 7-1-2010, applied only to LLCs formed after that date and to electing earlier-formed LLCs. / July 1, 2010
Iowa / January 1, 2009 / From 1-1-2009 to 1-1-2011, applied to LLCs formed after that date and to electing earlier-formed LLCs. / January 1, 2011
Minnesota / August 1, 2015 / From 8-1-2015 to 1-1-2018, will apply to all LLCs formed on/after 8-1-2015 and electing earlier-formed LLCs. / January 1, 2018
Nebraska / January 1, 2011 / From 1-1-2011 to 1-1-2013, applied only to LLCs formed after 1-1-2011 and electing earlier-formed LLCs. / January 1, 2013
New Jersey / March 18, 2013 / From 3-18-2013 to 4-1-2014, applied only to LLCs formed after 3-18-2013 and electing earlier-formed LLCs. / March 1, 2014
South Carolina / (not yet enacted; introduced into the state legislature in 2014)
Utah / January 1, 2014 / From 1-1-2014 to 1-1-2016, apply only to LLCs formed on or after 1-1-2014 and electing earlier-formed LLCs. / January 1, 2016
Wyoming / July 1, 2010 / For LLCs organized before 1-1-2010, the provisions of the prior act pertaining to management, division of profits provisions, distribution of assets upon dissolution and the stated term provisions were continued until 7-1-2014 unless the LLC amended its articles of organization to provide otherwise. / July 1, 2014

9)Several states’ revised LLC acts have varied from the default RULLCA provisions. For example, although the RULLCA permits an LLC to be formed for any lawful purpose, the California LLC statute does not permit professional LLCs. Similarly, the RULLCA permits foreclosure of a member’s right to distributions to satisfy a judgment; however, New Jersey amended its LLC statute in 2013 to remove the foreclosure remedy. The revised Minnesota act (when effective in 2015) will specifically permit board-managed LLCs, a management form not provided for by the RULLCA. Needless to say, practitioners would be well advised to carefully check their state’s LLC statute for any variations on the default RULLCA provisions. ▲