The Single Member Limited Liability Company as Disregarded Entity: Now You See it, Now You Don’t

The power and complexity of the single member limited liability company (“SMLLC”) comes from a conceptual contradiction: the conflation of owner and organization for tax purposes and the separation of owner and entity for non-tax, state law purposes. The contraction has significant practical consequences, which this article explores and illustrates, considering: • The SMLLC in federal court (single member not permitted to represent the LLC) • The IRS’s tortuous path to determining whether an SMLLC’s sole member is liable for the SMLLC’s unpaid employment taxes (yes; yes vindicated by the courts; then no, as a matter of policy) • Transfer taxes on a single member’s contribution of land to the member’s solely-owned LLC (maybe taxable, maybe not) • Whether the membership transfer restrictions built into LLC statutes in order to prevent the separate creditors of an LLC member from intruding into the business of a multi-member LLC ought to be applied to allow a sole member to shelter assets from the claims of the sole member’s legitimate creditors (under advisement by one state supreme court for more than a year) The article concludes that “practitioners must exercise great caution when working with an SMLLC, because, depending on which legal regime applies, the SMLLC may be as visible and substantial as a stone wall, or as diaphanous and subject to disappearance as the Cheshire Cat.

What Is a Charging Order and Why Should a Business Lawyer Care?

Suppose your client has a judgment from a court in state X against a shareholder of a closely held corporation organized under the law of state X. You know that your client can levy on the judgment debtor’s shares to enforce the judgment and either obtain the shares (and attendant voting and economic rights) or trigger a pre-existing buy-out agreement with the shareholders or the corporation, which will replace the judgment debtor’s shares with right to payment. The relevant civil procedures may be complicated (or even arcane), but in theory your client’s remedy is straightforward. Now suppose that the judgment debtor is a member of a limited liability company organized under the law of state X. Your client may not levy on the debtor’s membership interest and, moreover, has no right under any circumstances to acquire or dispose of any governance or information rights associated with the membership. A charging order, which “constitutes a lien on a judgment debtor’s transferable interest and requires the limited liability company to pay over to the person to which the charging order was issued any distribution that otherwise would be paid to the judgment debtor,” is “the exclusive remedy by which a person seeking in the capacity of judgment creditor to enforce a judgment against a member or transferee may satisfy the judgment.” ULLCA (2013) § 503(a), (h). (The rights of a secured creditor are an entirely separate matter. For an introduction to the complex interaction between Uniform Commercial Code, Article 9 and the “pick your partner” principle, see a recent article by Carl S. Bjerre, Daniel S. Kleinberger, Edwin E. Smith, and Steven O. Weise. This column provides an introduction to the charging order, a remedy that is abstruse, arguably arcane, and in effect as much a remedy limitation as a remedy. Part II explains the origins and rationale for the charging order and its status as the “exclusive remedy.” Part III, written for a “charging order neophyte,” (i) describes the mechanics of charging orders, and (ii) discusses how the charging order differs from ordinary post-judgment remedies in two important ways. Part IV lists a number of difficult, open issues pertaining to charging orders. Part V explains why a business lawyer should care about the charging order and offers a suggestion for proactive lawyering. Part VI concludes by identifying two excellent resources for further information. Almost all the observations in this column apply equally to charging orders pertaining to general and limited partnership; however, for simplicity’s sake, this column refers solely to limited liability companies and members

Charging Orders and the New Uniform Limited Partnership Act: Dispelling the Rumors of Disaster

Last year, an article published in this magazine focused on the charging order as the Exclusive Remedy Against a Partnership Interest and announced the [s]hocking [r]evelation that ULPA (2001)--the new Uniform Limited Partnership Act--undermines the exclusive remedy limitation on charging orders. The authors asserted categorically that, from an asset protection perspective, the 2001 Act is considerably less protective of a partner\u27s partnership interest than the 1976 Act. Elizabeth M. Schurig & Amy P. Jetel, A Charging Order Is the Exclusive Remedy Against a Partnership Interest: Fact or Fiction?, Prob. & Prop. 57, 58 (Nov./Dec. 2003). As this article will show, the rumors of disaster are unfounded, and ULPA (2001)\u27s provisions on charging orders are nothing to be feared. To support this calming assertion, this article will explain: (1) the history and purpose of the charging order remedy, (2) the consequences of charging order foreclosure (including the possibility of redemption), and, most importantly from a practical perspective, (3) the current state of the law governing charging orders, foreclosure, and limited partnerships. Like the November/December article, this article leaves aside the separate issues that arise when secured creditors exercise rights and remedies under UCC Article 9

Agency in the Alternatives: Common-Law Perspectives on Binding the Firm

This chapter in a forthcoming book examines the external aspects of agency law in the context of unincorporated firms, that is, the capacity of actors associated a firm to bind it to the legal consequences of interactions with third parties. The chapter focuses in particular on the impact of acts done by a representative for which the representative lacked actual authority. The chapter differentiates the terminology and concepts associated with partnership law from the common law of agency, in particular, a partner\u27s capacity to bind the firm albeit the partner lacks actual authority, which the chapter terms the partner\u27s positional power. Turning to LLCs, the chapter argues that basic agency issues are muddled, due in part to a historically explicable overhang of partnership concepts and terminology --- since obviated by changes in tax law --- and that the muddle most significantly (and surprisingly) affects LLCs organized under the Delaware LLC statute. The chapter demonstrates that such confusion is not inevitably and that, short of formal changes in statutory text, judicial decisions and an arguable consensus among expert lawyers may mitigate the confusion

Agency in the Alternatives: Common-Law Perspectives on Binding the Firm

This chapter in a forthcoming book examines the external aspects of agency law in the context of unincorporated firms, that is, the capacity of actors associated a firm to bind it to the legal consequences of interactions with third parties. The chapter focuses in particular on the impact of acts done by a representative for which the representative lacked actual authority. The chapter differentiates the terminology and concepts associated with partnership law from the common law of agency, in particular, a partner\u27s capacity to bind the firm albeit the partner lacks actual authority, which the chapter terms the partner\u27s positional power. Turning to LLCs, the chapter argues that basic agency issues are muddled, due in part to a historically explicable overhang of partnership concepts and terminology --- since obviated by changes in tax law --- and that the muddle most significantly (and surprisingly) affects LLCs organized under the Delaware LLC statute. The chapter demonstrates that such confusion is not inevitably and that, short of formal changes in statutory text, judicial decisions and an arguable consensus among expert lawyers may mitigate the confusion

PROSPEK PERSEROAN PEMEGANG SAHAM TUNGGAL TANPA PERKECUALIAN UNTUK KEMUDAHAN BISNIS

As a general rule, economic enterprises or companies should be established based on the principle of capital association and agreement.  In contrast, Law No. 40 of 2007 re. Limited Liability Companies, provide exemptions to both principles. On the basis of this observation the issue discussed  in this articles are: (1) why is the exemption provided only for certain forms of economic enterprises or companies; (2) is this exemption to the rule justified, perceived from the principle of equality; and (3) what are the justification for allowing the establishment of a limited liability company with a single investor (sole ownership). Using a juridical doctrinal approach the answer to the above questions are: (1) exemption are granted for state owned companies, established and regulated under public law; (2)  the exemption is unjust as it discriminates and allowed for discriminative treatment; and (3) the practice of establishing a limited liability company by a single shareholder is a long standing practice. 

The Next Generation: The Revised Uniform Limited Liability Company Act

In July, 2006, the National Conference of Commissioners on Uniform State Laws approved Re-ULLCA - the Revised Uniform Limited Liability Company Act. The product of a three-year drafting process, heavily influenced by 13 advisors appointed by the ABA, the new Act brings major innovations to the law of limited liability companies. This article, written by the two co-reporters for the drafting committee: (i) explains why the Conference decided to draft a new LLC statute, reviews the process through which the Conference produced and approved the new Act, and describes the Act\u27s basic architecture; (ii) highlights the Act\u27s major innovations; and (iii) provides a roadmap through the Act\u27s intricate and all-important provisions concerning the operating agreement. The following specific topics are addressed: the operating agreement; the decision to deviate from RUPA and un-cabin fiduciary duty; returning good faith and fair dealing to the concept\u27s contract law moorings; the question of an owner\u27s legitimate self-interest; reformulating the duty of care; the question of the shelf LLC; statutory apparent authority (de-codifying apparent authority by position); statements of authority by position; templates for management structure; charging orders; a remedy for oppressive conduct; derivative claims and special litigation committees; organic transactions - mergers, conversions, and domestications; the decision to eschew the series LLC; and the lot of mere transferees