February 28, 2013

Our Mini-Theme: LLCs, Partnerships and Unincorporated Entities

Thomas E. Rutledge

Limited Liability Companies are now the dominant form for the organization of business ventures in the United States, employed in applications as broad as is the economy. Some LLCs are holding companies for family vacation homes while other LLCs are publically traded. Some LLCs are used to structure professional practices while others operate as hedge funds.

In October 2012, the Committee on LLCs, Partnerships and Unincorporated Entities held its inaugural LLC Institute at which there were reviewed a wide variety of issues involving LLCs and related unincorporated forms. Questions arising with respect to LLCs have a pair of bases. First, LLCs remain relatively young - it was not until they received IRS sanction in 1988 that they began to expand beyond two initial adoptions, and it was not until the adoption of the "check-the-box" classification regulations in 1997 that complete flexibility, including the single-member LLC, was available. Where and how the LLC fits into the range of other areas of law (agency, tax, and bankruptcy being but three examples) involves questions that continue to be assessed. Second, while we speak of LLCs as a single phenomenon across the country, there are in fact often material distinctions between the various statutes, and individual operating agreements can create structures that are radically different from one another. While most states by statute provide a default rule as to the fiduciary obligations of the members and managers, the Delaware act is silent, a lacuna that has given rise to numerous conflicting opinions as to what duties, if any, exist in the absence of a standard agreed to by contract. A few states as well provide for "series," an internal segregation of assets and liabilities that give rise to significant questions including the ability to seek bankruptcy protection for an individual series, tax treatment of a series, and interstate recognition of the asset/liability segregation.

Building on some of the presentations that took place at the 2012 LLC Institute, Allen Sparkman offers his insights on how series will be treated in interstate transactions and possible tax aspects, while Professor Michelle Harner, Jennifer Ivey-Crickenberger, and Tae Kim provide especially helpful thoughts on the analysis to be employed in determining whether an individual series of an LLC may seek bankruptcy protection and other uncertainties under the bankruptcy law including substantive consolidation. Jay Adkisson, Professor Carter Bishop, and I review a number of developments in the law of charging orders including tax treatment and choice of law concerns. Last, but certainly not least, Paul Altman, Elisa Erlenbach Maas, and Michael Maxwell review opportunities for modifying fiduciary duties (whatever they may be) in Delaware LLCs.

In closing, if you are involved in drafting LLC agreements, representing persons investing in LLCs, or litigating disputes involving LLCs, you are hopefully already a member of the Committee on LLCs, Partnerships and Unincorporated Entities. If you are not, you hopefully will join, and we will look forward to meeting you at the 2013 Spring Meeting or at the 2013 LLC Institute scheduled for October 17-18 in Arlington, Virginia.

Thomas E. Rutledge