July 09, 2009

Incorporation Transparency and Law Enforcement Assistance Act (S. 569.IS)

Who owns America?  American business entities?  That's what Senator Carl Levin (MI) wants to know.   In 2008, Senator Levin (and co-sponsors, including then Senator Obama) introduced the Incorporation Transparency and Law Enforcement Act (S. 2956).   Earlier this year, Senator Levin (and co-sponsors) reintroduced the Act as S.569.IS.  on June 18, 2009, the Senate Homeland Security and Governmental Affairs Committee held a hearing on Examining State Business Incorporation Practices: A Discussion of the Incorporation Transparency and Law Enforcement Assistance Act.  Leslie Reynolds of the National Association of Secretaries of State (NASS) gave this summary of the hearing:

* * *  Sec. Elaine Marshall, NC Secretary of State and NASS Company Formation Task Force Co-Chair was one of the witnesses invited by Chair Lieberman (I-CT).

There were a total of five witnesses (all of their prepared testimony can be found on the [Senate Homeland Security and Governmental Affairs (HSGAC)] hearing page,along with the webcast of the hearing.) Witnesses representing the state perspective were Secretary Marshall and Harry Haynsworth, ULC drafting committee chair for the Uniform Law Enforcement Access to Entity Information Act (ULEAEIA). The Justice Department (DOJ), Immigration & Customs Department (ICE) and the ADA's office in New York City had witnesses testifying from the perspective of law enforcement.

Three Senators were present for the hearing - Chair Lieberman (I-CT), Sen. Levin (D-MI) and Sen. Carper (D-DE). Chair Lieberman stayed for the first round of questions, but left and asked Sen. Levin to chair the second round of questions. The hearing lasted two and a half hours, with a 20 minute break for a floor vote.

The full opening statements of the Senators present can be found on the HSGAC hearing page.  Chair Lieberman commended the work of the Permanent Subcommittee staff and the commitment of Sen. Levin on this issue. He said there should be a way to draft balanced "sunshine" legislation which would provide the information that law enforcement needs and protect investor privacy without burdensome administrative costs to implement. Sen. Levin said that states were forming 2 million businesses each year without knowing who is behind them. He also said that states were reluctant to admit there was a problem. Sen. Carper (D-DE) said that he hoped that the committee seriously considered the offer of Haynsworth and the ULC to move forward working together and that the solution will be a balance of interests between privacy and transparency.

Janice Ayala of ICE said that her agency has recognized for quite some time that the state incorporation process poses a serious threat . She cited several examples of investigations that have taken place over the past few years and said that shell companies (those that exist only on
paper - her definition) are being formed by criminals in the US and then they are opening bank accounts overseas. She also said that criminals are purchasing "shelf companies - aged companies" that are being promoted on the Internet and used to conduct criminal activities. She
said that the solution is federal legislation but does not credit S.569 as the solution.

Jennifer Shasky of DOJ said that federal legislation must include four components:

   (1) law enforcement must have access to the names and contact information for those who have control over a company and the company's assets;

   (2) define "beneficial owner" the same across all 50 states and collect name, address and photo ID from ALL recognized as beneficial owner,

   (3) obtain beneficial ownership information in an accurate and timely fashion which means it must be maintained on site in the state of formation, and it must be updated any time info changes and it must be certified annually, and

   (4) there must be a federal enforcement component.


Secretary Marshall outlined the work of the NASS task force, our request of the Uniform Law Commissioners and the ABA on drafting Uniform Law and the impact that S. 569 would have on NC specifically from a filing office standpoint. She explained, in detail, the challenges that state offices would face implementing S.569 - that you would be the front lines when it came to implementing- and the public education challenges you would face both in staffing and in costs.

Mr. Kaufman of the NY City ADA's office said his office supports S.569 because they deal with the fallout of "shell companies" everyday. He called the issue a "no-brainer" and said that "these shell companies ust come to an end." He said that as a country we have a "moral obligation" to lead on this issue and it is embarrassing when conducting an investigation with international authorities. He said that from a law enforcement perspective, the Uniform Law Commissioners draft is "worse than nothing" because it alerts an entity directly when they are being investigated. Often the law enforcement officials represented appeared to believe that those engaged in criminal activity would file truthful information. When Sec. Marshall pointed out that it was unlikely that criminal enterprises would file truthful information, Mr. Kaufman of the ADA's office said false information was still helpful because once caught, prosecutors could show criminal intent with the filing of false information - this still wouldn't aid in the investigation.

Harry Haynsworth of the Uniform Law Commissioners said that the solution has to be state legislation with a uniform standard because corporate law has been a matter for states. He is concerned that S.569 would result in massive unintentional non-compliance and that information would be frequently be outdated. He made an offer to move forward, working with the committee, to work on federal legislation that would require states to implement ULC version or they would be subject to federal legislation (S.569). The federal legislation would also include funding and federal penalties for non-compliance.

Sen. Levin asked Ms. Shasky if DOJ supported his bill. She said that DOJ thinks the bill needs to be amended to include photo ID for all beneficial owners not just international owners. DOJ also wants the beneficial ownership information updated anytime there is a change, not just updated annually. DOJ also wants to add an annual certification of the information. She did clarify that the Administration does not have an official position on S.569. ICE reported that Homeland Security is working on a position. Kaufman of the ADA's office again said he thinks that the issue is a no-brainer and he doesn't understand the state and business community perspective that the requirements will impose a burden. Law enforcement witnesses made it clear that they wanted the referenced provisions in place to address what they acknowledged were [0.1%] of the businesses out there conducting illegal activity.  Secretary Marshall and Harry Haynsworth referenced the fact that they were working on behalf of the 99.9% of the businesses conducting legitimate activities. Levin said that his approach to collecting the information was much simpler than the ULC approach.

Marshall and Haynsworth argued that the definition of beneficial ownership was extremely difficult to implement from a business filing perspective. Sen. Levin and law enforcement did not agree and said that the U.S. Treasury, Financial Action Task Force and S.569 all defined "beneficial ownership." To support his point, Mr. Haynsworth read from the July 5, 2007 Financial Action Task Force Third Mutual Evaluation Report of the United Kingdom, page 234 Sec. 1132 and 1133.

(list spacing and hot-links added).

The NASS has established a Company Formation Task Force on this issue.  Its website has a veritable history on this issue, with links to more information.

posted by Gary Rosin

July 9, 2009 in Legislative Developments | Permalink | Comments (0) | TrackBack

June 22, 2009

Texas: "Reasonable Compensation" and Limitations on LLC & LP Distributions

Section 101.206 of the Texas Business Organization Code (TBOC) prohibits an LLC from making distributions when the fair value of its assets is, or would become, less than its total liabilities.  Section 41 of Senate Bill 1442 amended TBOC Section 101.206 so as to exclude "reasonable compensation" from the limitations of Section 101.206:

   (f) For purposes of this section, "distribution" does not include an amount constituting reasonable compensation for present or past services or a reasonable payment made in the ordinary course of business under a bona fide retirement plan or other benefits program.

Similar language was included in the limitations of distributions of an LLC series, TBOC § 101.613(h) (Section 43 of SB 1442), andof a limited partnership, TBOC § 153.210(b) (Section 52 of SB 1442).

First, In the context of partnerships, TBOC Section 151.001(2) had already defined "distribution" as a transfer to a partner in the partner's "capacity as a partner". I would think that any amount a limited partnership had agreed to pay a partner as compensation for services would not transfers to the partner as partner. If the legislature wanted to make that clear, the logical place to do that would have been TBOC section 151.001(2). TBOC Chapter 151 is a "mini-hub," its provisions apply to all partnerships, and to all uses of "distribution" in Chapters 151 through 154. Adding the limitation to Section 153.210 limits the scope of the carve out.

Second, Chapter 152 (general partnerships) has no limitations on distributions. Before the advent of the LLC, that made sense; all partners were liable for partnership obligations. With the introduction of the LLP (you can blame, or credit, Texas for that), limitations on distributions seem appropriate. But neither Texas nor the RUPA have any such limitations, leaving creditors to fraudulent transfer law.

posted by Gary Rosin

June 22, 2009 in Commentary, Legislative Developments | Permalink | Comments (0) | TrackBack

June 19, 2009

Texas Closes Door on Ederer Liability to Other Partners in LLPs

In Ederer v. Gursky, 9 N.Y.3d 514, 881 N.E.2d 204, 851 N.Y.S.2d 108, 2007 N.Y. Slip Op. 09960 (2007), the New York Court of Appeals interpreted the New York LLP shield to allow claims by partners for breach of obligations of other partners, or of the partnership.  See my earlier post, Liability of LLP partners To Each Other

Section 47 of Senate Bill 1442 amends Section 152.801(a) of the Texas Business Organizations Code to read as follows:

     (a) Except as provided by Subsection (b) or the partnership agreement, a partner in a limited liability partnership is not personally liable to any person, including a partner, directly or indirectly, by contribution, indemnity, or otherwise, for a debt or obligation of the partnership incurred while the partnership is a limited liability partnership.

Oddly, the Legislature chose to add "or the partnership agreement" to the introductory exception.  Like the RUPA, Texas has a central provision regarding partner autonomy and its limits.  TBOC § 152.002.  While the Legislature may have felt a "belt and suspenders" approach was necessary to catch the attention of the courts, it seems bad policy to start dropping in references to the partnership agreement.

posted by Gary Rosin

June 19, 2009 in Legislative Developments | Permalink | Comments (0) | TrackBack

June 17, 2009

Contracting re Fiduciary Duties in Texas UBEs

Yet another way in which unincorporated business entities (UBEs) under the Texas Business organizations code ("TBOC") differ is the ability to contract as to fiduciary duties.

General Partnerships (Chapter 152).  Section 152.002(B)(2)-(4) are parallel to RUPA section 103(b)(3)-(5).  That is, no eliminations of the Section 152.204-.207 duties, but excluded specific activities or standards, so long as not manifestly unreasonable.

Limited Partnerships (Chapter 153).  Chapter 153 is a RULPA-type statute, so Section 153.003(a) generally incorporates Chapter 152, and a general partner has the same rights, powers and restrictions, and liabilities as a partner in a general partnership, § 153.152.

Limited Liability Companies (Chapter 101).  Section 101.401 is based on the early version of Delaware LLC 18-1101(c)(2):  the company agreement may "expand or restrict" duties, including fiduciary duties, and related liabilities.  As suggested by the Delaware Supreme Court in Gotham Partners, L.P. v. Hallwood Realty Partners, L.P.,817 A.2d 160, expanding or restricting probably does not include eliminating.  Id. at  166-68.  Such an interpretation would be consistent with Section 152.002(b)(2-(4), but without an express "manifestly unreasonable" limitation.  Would a "manifestly unreasonable" limitation be the equivalent of an elimination?

posted by Gary Rosin

June 17, 2009 in Legislative Developments | Permalink | Comments (0) | TrackBack

June 16, 2009

More Texas & Creditors of Owners

We have already noted the preemption of Sections 9.406 & 9.408of the Texas UCC and the elimination of the right to foreclose a charging order on an ownership interest in a Texas LLC.  The rights of creditors of owners of interests in Texas unincorporated business entities (UBEs) under the Texas Business Organizations Code ("TBOC") vary widely, depending on the form of UBE:

ssor statute, deleted the concept of charging orders, as applied to interests in (general) partnerships.  Compare TBOC §§ 152.401-.406 with TBOC §§ 101.108-.112 and TBOC §§ 153.251-.257.  As a result, the traditional remedies--attachment, garnishment, etc.--are available to creditors of owners of interests in (general) partnerships.

  • A charging order is the exclusive remedy for a judgment creditor of an owner to reach an ownership interests in either a limited partnerships or an LLC.  TBOC §§ 101.112 (LLCs) & 153.256 (limited partnerships).
  • Senate Bill 1442 amended TBOC Section 101.112 by adding Subsection (c), which prohibits foreclosure of charging orders on ownership interests in LLCs.  SB 1442, § 40.  [Correction]  A similar change was made to TBOC Section 153.256 (charging orders against ownership interests in limited partnerships).  SB 1442 § 53. [Hat tip to Stephen Paine for reminding me of the dangers of posting when you are tiered!.

    In part, these differences are a matter of path dependence (adoption of new statutes at different times).  I had hoped that the most-recent legislative session might harmonize creditor remedies.  Instead, they beefed up the limited partnership and LLC charging order provisions, and left general partnerships hanging. 

    To paraphrase the old saw, when the legislature is session, you need to lock-up your spouses, children and pets!  That's why we only let them meet for five months every two years!

    posted by Gary Rosin
    (with edits 06/16/2009)

  • June 16, 2009 in Legislative Developments | Permalink | Comments (1) | TrackBack

    June 12, 2009

    More Texas Hurdles for Creditors of LLC Members or Limited Partners

    Tom Rutledge has already pointed out that SB 1442 pre-emptsSection 9.406 and 9.408 of the Texas UCC.  Sections 40 and 53 of the bill go even further, and adds language that prohibits the foreclosure of a "charging order lien", whether "under this code or any other law," for ownership interests in LLCs and in limited partnerships.  Tex. Bus. Org. Code §§ 101.112(c) & 153.256(c)  (emphasis added).

    posted by Gary Rosin
    revised 06/19/2009

    June 12, 2009 in Legislative Developments | Permalink | Comments (0) | TrackBack

    Texas Adopts Series LLCs

    Among things, SB 1442 amends the Texas Business Organizations Code  to provide for series LLCs.  Id.at § 45 (adding Subchapter M, §§ 101.601 et/ seq.).  The Bill Analysis describes the amendment as follows:

    S.B. 1442 authorizes the creation of a series limited liability company by allowing a limited liability company agreement to establish or provide for the establishment of one or more designated series of members, managers, membership interests, or assets

       that has separate rights, powers, or duties with respect to specified property or obligations of the company or profits and losses associated with specified property or obligations, or

       that has a separate business purpose or investment objective.

    The bill sets out provisions relating to

       the enforceability of the obligations and expenses of a series against its assets,

       the holding of assets associated with a series, and

       the requirements for a notice of limitation on the liabilities of a series.

    The bill 

       establishes the general powers of a series;

       provides that a member or manager associated with a series or a member or manager of the company is not liable for a debt, obligation, or liability of a series unless the company agreement specifically provides otherwise; and

       allows the company agreement to expand or restrict any duties, including fiduciary duties, and related liabilities that a member, manager, officer, or other person associated with a series has to the series or the company, a member or manager associated with the series, or a member or manager of the company.

    The bill

       authorizes the company agreement to establish classes or groups of members or managers associated with a series and

       sets forth provisions relating to

    the governing authority of a series,

    the effect of certain events on a manager or member with respect to a series,

    the status of a member with respect to a distribution,

    the establishment of a record date for allocations and distributions, and

    the making of distributions with respect to a series.

    The bill establishes that the provisions of law related to limited liability companies apply to a series limited liability company and its associated members and managers, to the extent the provisions governing each company are not inconsistent.

    The bill

       authorizes a series and its business and affairs to wind up and terminate without causing the winding up of the company[,]

       provides that the series terminates on the completion of the winding up process[,}.

       ... specifies the conditions that require the winding up of a series and sets out procedures for the winding up and termination[, and]

       ...  provides for the revocation of a voluntary winding up, the cancellation of an event requiring a winding up, the authority of a series to continue business following either situation, and the winding up by order of a district court with appropriate jurisdiction.

    Id. at 4-5 (indentations added).

    While the general approach of Subchapter M is a statute-within-a-statute, Section 101.609 includes a general incorporation of Chapter 101 (The tex. Bus. Org. Code "spoke" for LLCs):

    Sec. 101.609. APPLICABILITY OF OTHER PROVISIONS OF CHAPTER; SYNONYMOUS TERMS.

         (a) To the extent not inconsistent with this subchapter, this chapter applies to a series and its associated members and managers.

         (b) For purposes of the application of any other provision of this chapter to a provision of this subchapter, and as the context requires:

         (1) a reference to "limited liability company" or "company" means the "series";

         (2) a reference to "member" means "member associated with the series"; and

         (3) a reference to "manager" means "manager associated with the series."

    posted by Gary Rosin

    June 12, 2009 in Legislative Developments | Permalink | Comments (0) | TrackBack

    May 26, 2009

    Texas adopts 9-406/408 Carve-outs for LLC and Partnership Interests

    Section 39 of Texas S.B. 1442 provides, inter alia, for 9-406 and 9-408 carve-outs for membership interests in an LLC. Specifically, it is provided that a new subsection (c) will be added to Section 101.106 of the Texas Business Organizations Code to provide:

    Sections 9.406 and 9.408, Business & Commerce Code, do not apply to a membership interest in a limited liability company, including the rights, powers and interests arising under the company’s certificate of formation or company agreement or under this code. To the extent of any conflict between this subsection and Section 9.406 or 9.408, Business & Commerce Code, this subsection controls. It is the express intent of this subsection to permit the enforcement, as a contract among the members of a limited liability company, of any provision of a company agreement that would otherwise be ineffective under Section 9.406 or 9.408, Business & Commerce Code.

    A similar revision appears at section 57, there addressing interests in a partnership. You may also want to take a look at sections 60 and 61 of that bill, which amend 9-406 and 9‑408 to expressly provide that they do not apply to interests in either an LLC or a partnership.

    The effective date is 9/1/09.

    posted by Thomas E. Rutledge

    Update:  The House Bill Analysis of Section 39 describes the amendments as follows:

    Provides that Sections 9.406 (Discharge of Account Debtor; Notification of Assignment; Identification and Proof of Assignment; Restrictions on Assignment of Accounts, Chattel Paper, Payment Intangibles, and Promissory Notes Ineffective) and 9.408 (Restrictions on Assignment of Promissory Notes, Health-Care-Insurance Receivables, and Certain General Intangibles Ineffective), Business & Commerce Code, do not apply to a membership interest in a limited liability company, including the rights, powers, and interests arising under the company's certificate of formation or company agreement or under this code. Provides that to the extent of any conflict between this subsection and Section 9.406 or 9.408, Business & Commerce Code, this subsection controls. Provides that it is the express intent of this subsection to permit the enforcement, as a contract among the members of a limited liability company, of any provision of a company agreement that would otherwise be ineffective under Section 9.406 or 9.408, Business & Commerce Code.

    Id. at 9 (emphasis added).

    posted by Gary Rosin

    May 26, 2009 in Legislative Developments | Permalink | Comments (0) | TrackBack

    January 14, 2009

    Revised Prototype LLC Act v. 2.02 (Jan. 2009)

    Today the Revised Prototype LLC Act Task Force of the Committee on LLCs, Partnerships and Unincorporated entities of ABA Section on Business Law released for comments the January 2009 Draft of the Revised Prototype LLC Act v. 2.02 (Jan. 2009) (note:  You must be a member of the Committee to be able to access the draft online).  Comments should be addressed to:

    According to Task Force co-chair Scott Ludwig, the Task Force is still reviewing

    1. several variations of "series" and the best methods to implement such in the Act
    2. the Delaware retroactive addition of members
    3. reviewing the issue of whether "management rights" should be defined as not being a property right so as to prohibit a bankruptcy trustee from stepping into the shoes of the person exercising such "management rights"
    4. the comments that are to be provided with the Act.

    For those members of the LLC, etc Committee who are interested in the work of the Task Force can subscribe to the Task Force's listserv.  For more information, go to the Task Force's ABA website.

    posted by Gary Rosin

    January 14, 2009 in Legislative Developments | Permalink | Comments (0) | TrackBack

    December 18, 2008

    Rights to Information under RULLCA Sec. 410

    In Information Rights Under New Iowa LLC Law, Marc Ward points out that, under Sec. 489.410 of the Iowa RULLCA, members have the right to certain information without demand.  He notes the breadth of Section 489.410.1.b(1)--Section 410(a)(2)(A) of the RULLCA.  That part of Section 410 requires a member-managed LLC to furnish each member

    [w]ithout demand, any information concerning the company's activities, financial condition, and other circumstances which the company knows and is material to the proper exercise of the member's rights and duties under the operating agreement or this chapter....

    Section 410(a)(3) imposes the same obligation to disclose on members of member-managed LLCs, but only to the extent that they know that information.  Ward argues that this affirmative disclosure obligation should apply on where the LLC is affirmatively communicating with its members.

    I would argue that the "member's rights and duties" to which Section 410(a)(2)(A) refers are the rights and obligations relating to management of LLC by a member of a member-managed LLC.  Section 410(b)(1) makes this clear by providing that, in manager=managed LLCs,

    [t]he informational rights stated in subsection a and the duty stated in subsection (a)(3) apply to the managers and not the members.

    In manager-managed LLCs, the LLC (and its manager) are required to provided information without demand only

    [w]henever this [act] or an operating agreement provides for a member to give or withhold consent to a matter, before the consent is given or withheld, the company shall, without demand, provide the member with all information that is known to the company and is material to the member’s decision.

    RULLCA § 410(b)(4).

    Regardless of whether a manager is a member, the manager's right to relevant information relating to the management of the LLC should be much broader.  Where there is more than one manager, arguably, that should include the right to information about, and relating to, material actions by other managers.

    posted by Gary Rosin

    December 18, 2008 in Commentary, Legislative Developments | Permalink | Comments (0) | TrackBack

    December 10, 2008

    California & RULLCA

    Next year, the California State Bar's Partnerships and Limited Liability Companies Committee will begin reviewing the Revised Uniform Limited Liability Company Act (RULLCA) for possible recommendation to the state legislature for adoption.  If California were to adopt this revised act, it likely will be a significant impetus for other states to adopt RULLCA.  It appears that for the first time, LLCs have a real chance of being governed by uniform statutes nationwide.  The question arises, however, whether RULLCA is the best statute to drive this march towards uniformity.  In my view, as stated in a previous post, there is much to criticize in RULLCA, such as its failure to provide for series LLCs, and its inclusion of shelf LLCs.

    Posted by Donald Scotten

    December 10, 2008 in Legislative Developments | Permalink | Comments (0) | TrackBack

    December 04, 2008

    Oklahoma Has NOT Adopted ULPA(2001)

    Oklahoma purported to adopt ULPA (2001) in 2008.  See Senate Bill 1708.  The bill contained a number of other provisions, including an adoption of the Uniform Limited Cooperative Association Act, amendments to the UCC as adopted in Oklahoma, and amendments to the Oklahoma Trust Act.

    The Oklahoma Constitution, at Art. V., section 57, contains a "single subject" rule.  Suit was filed challenging SB 1708 for violating the single subject rule.

    In a two-sentence order, the Oklahoma Supreme Court invalidated SB 1708, stating that it "is facially contrary to the Oklahoma Constitution, Article V, Section 57."  Weddington v. Henry, 2008 OK 102, Case No. 106330 (OK Nov. 24, 2008) (per curiam).

    The Oklahoma Attorney General has 20 days from this decision within which to request reconsideration.

    Thomas E. Rutledge/Stoll Keenon Ogden PLLC/Louisville, Kentucky
    (minor edits by Gary Rosin)

    December 4, 2008 in Legislative Developments | Permalink | Comments (0) | TrackBack

    July 25, 2008

    Iowa Adopts RULLCA

         posted by Gary Rosin

    Iowa has adopted a version of the RULLCA, House File 2633 (enrolled version), Eighty-second General Assembly (Iowa 2008).  I haven't had a chance to study it, but Marc Ward has several comments on the new law his blog, Ward on Iowa Limited Liability Companies.  Hat tip to Steve Odem, who posted this on LNET-LLC.

    July 25, 2008 in Legislative Developments | Permalink | Comments (0) | TrackBack

    July 01, 2008

    Vermont: Virtual LLCs?

         posted by Gary Rosin

    According to an article on CFO.com, Vermont Wants to Be the "Delaware of the Net", recent amendments to the Vermont LLC and Corporations Acts allow for the formation of "virtual" LLCs and corporations.  The amendments are tucked away in Sections 74-76 (LLCs) and 77-100 (corporations) of "An Act Relating to Miscellaneous Tax Amendments," 2008 Vt. Acts & Resolves 109.  So far as LLCs are concerned, nothing in the amendments are particularly remarkable:  electronic operating agreements, documents and writings; electronic delivery, state filings and record-keeping; and allowing meetings via

    any structured communications conducted by participants in person or through the use of electronic or telecommunications medium permitting simultaneous or sequentially structured communications for the purpose of reaching a collective agreement.

    11 V.S.A. § 3001(26) (as amended).

    Hat tip to Jay Adkisson via the discussion list LNET-LLC.

    July 1, 2008 in Legislative Developments | Permalink | Comments (0) | TrackBack

    January 25, 2007

    North Carolina Legislation Introduces Involving Hybrid LLC Form

    A recent article in the High Point Dispatch discusses how a North Carolina legislative study panel has introduced legislation intended to revive the state’s furniture manufacturing industry making use of a hybrid form of LLC known as an L3C. This form of LLC, also known as a “Charitable LLC,” can be structured as a partnership or a joint venture between a for-profit organization and a non-profit organization, and the charitable activity is not subject to income tax. The IRS severely restricts the use of this entity, so it is not very commonly used.

    Under North Carolina’s draft bill, called the “Omnibus Endangered Manufacturers Act,” furniture companies are authorized to operate as L3Cs, and they can accept investments from certain non-profit organizations. The non-profits can own the factory buildings, which the furniture companies lease from the foundations. The foundations are allowed to recoup only a 2% return on the building leases. Non-profits can also own machinery and lease it to furniture companies for a 3% return. As the article explains, figures from the study committee and production cost analyses conducted by the University of North Carolina Kenan-Flagler Business School show that using an L3C could significantly increase a furniture manufacturer’s operating profits on the sale of its case goods.

    To read the article, go here.

    And to read more about the emergence of L3Cs from the Aspen Institute Roundtable, go here.

    [Gregory Duhl]

    January 25, 2007 in Legislative Developments | Permalink | Comments (0) | TrackBack

    July 29, 2006

    New Zealand Plans To Amend Its Partnership Laws To Encourage Venture Capital Investment

    Under Part 2 of the Partnerships Act of 1908, New Zealand currently recognizes a form of limited partnership called a “special” partnership. The special partnership is made up of general partners and “special” partners. Under a special partnership, only a general partner may transact business of the partnership. Furthermore, a special partner can be held individually liable if, with the partner’s consent, the partner’s name is used in the partnership’s contracts or in the course of conducting the affairs of the partnership. Under current laws, there are no safe harbor provisions that allow the special partners to participate in the partnership’s management without exposure to individual liability. The current partnership laws, therefore, do not adequately protect the limited, or “special,” partners from individual liability, and they also do not sufficiently recognize the special partnership as a separate legal entity.

    In recent years, New Zealand has launched intense efforts to encourage venture capital investments in the country, and a government web site reports that because of the lack of protection from individual liability under the current partnership laws, “the special partnership remains an unsuitable vehicle for venture capital/private equity investment.” A government web site lists the following features of the special partnership laws that serve as current barriers to venture capital: (1) The special partnership has to be re-registered every 7 years, whereas venture capital/private equity funds are generally created for 10 years or more; (2) there is currently no central registry for special partnerships; (3) the current Partnerships Act contains no safe harbor provisions giving “special” partners any management rights in the business without exposing them to liability as general partners; (4) and the special partnership is not clearly recognized as a separate legal entity, which means that a foreign court could potentially treat the special partnership as a general partnership and impose individual liability on the limited partners.

    New Zealand is, therefore, planning to overhaul its partnership laws to give limited partners sufficient protection from individual liability. First, the government plans to repeal Part 2 of the Partnerships Act and to introduce limited partnerships in a Limited Partnerships Bill. Under the changes, the term “special partnership” would be changed to “limited partnership.” Furthermore, a limited partnership would be made up of general partners, who may be held liable for the partnership’s debts and obligations, and one or more limited partners, whose liability would be limited to their contributions to the partnership. Under the new bill, limited partnerships would also contain, among other things, the following features: the new bill would clarify that the limited partnership is a separate legal entity; the partnership could continue indefinitely; registration would be centralized; safe harbor provisions would allow limited partners to contribute their investing skills without being considered to have participated in management and, thus, exposed to individual liability; and the bill would clarify that limited partners could assign their interests, that general partners are subject to common law fiduciary duties, and that a limited partner is not the partnership's agent and has no authority to bind the partnership.

    Finally, because the changes would designate a limited partnership as a “separate legal personality,” current tax laws would treat a limited partnership as a company and would not allow tax flow-through status. Thus, the government has recently proposed numerous tax changes to all partnerships that would ensure tax flow-through status to encourage foreign investment. The proposed tax changes that would apply specifically to limited partnerships would include introducing the concept of  a “partner’s basis” to track the value of a partner’s interest. Furthermore, the proposed laws would introduce loss limitation rules, which would ensure that the actual level of a limited partner’s economic loss is reflected when the limited partner claims net tax losses in relation to its limited partnership interest. The proposed tax changes would generally apply to all partnerships under New Zealand’s Partnership Act of 1980; any limited partnerships that become registered as such under the planned Limited Partnership Bill; New Zealand residents who are partners in foreign general partnerships; and New Zealand residents who are partners in foreign limited partnerships that have at least one general partner, that are not publicly traded, and that do not have “separate legal personality.”

    To read more about the proposed changes, go here or here.

    It is interesting how Western countries have begun to introduce business forms to encourage investment that were popular in the United States decades earlier. There is room for a field of study in comparative unincorporated business associations.

    [Gregory Duhl]

    July 29, 2006 in Legislative Developments | Permalink | Comments (0) | TrackBack

    July 23, 2006

    Britain’s Legal Services Bill Update

    As we have discussed here and here, in May of this year the British government published a draft bill that would allow lawyers in England and Wales to go into business with non-lawyers. Under the new law, lawyers, accountants, and other professionals would be able to set up so-called “one-stop shops” providing an array of services. The Joint Committee on the Draft Legal Services is currently reviewing the proposed bill and is expected to issue a report on the bill by 25 July 2006. Stay tuned for more updates.

    To read articles discussing the latest updates on the bill, go here and here.

    [Gregory Duhl]

    July 23, 2006 in Legislative Developments | Permalink | Comments (0) | TrackBack

    July 21, 2006

    Recent Amendments To Ohio’s Corporation Law Address Liability Of Limited Partners And LLC Members

    The Ohio Legislature has enacted House Bill 301, which implements various changes in Ohio’s Corporation Law. The amendments include provisions clarifying the liability of limited partners and members of LLCs. First, with regard to judgment creditors of LLCs, before the amendments, section 1075.19 of the law stated that “if any judgment creditor of a member of a limited liability company applies to a court . . . to charge the membership interest of the member with payment of the unsatisfied amount of the judgment with interest, the court may so charge the membership interest. To the extent the membership interest is so charged, the judgment creditor has the rights of an assignee of the membership interest.” The amendments simply add the word “only” before the phrase “the rights of an assignee” to clarify that judgment creditors’ rights are specifically limited to those of an assignee.

    Next, before the amendments section 1775.14(B) provided generally that a partner in a registered LLP is not liable for the debts and obligations of the partnership or another partner arising out of wrongful acts committed while the partnership was a registered LLP and in the course of the partnership business. The amendments to the current law retain the protection from liability and add that the partner is not “personally” liable for such debts, obligations, or other liabilities “solely by reason of being a partner; acting or failing to act as a partner; or participating as an employee, consultant, contractor, or otherwise in the conduct of the business or activities of the registered limited liability partnership while the partnership is a registered limited liability partnership." The act also changes the italicized “and” above to “or.” Thus, the LLP amendments simply clarify the limited personal liability of a partner in a registered LLP. The partnership amendments also recognize partnerships as “entities” rather than “associations.”

    Finally, with regard to contributions of members of LLCs, before the amendments section 1705.09(A) provided that “[t]he contributions of a member may be in cash, property, services rendered, a promissory note, or any other binding obligation to contribute cash or property or to perform services.” The amendments add that, in addition to the above-listed contributions, a member may also make contributions by providing “any other benefit to the limited liability company; or by any combination of these.”

    The bill was signed by Ohio Governor Bob Taft on July 11, 2006, and will go into effect 90 days from signing.

    To read the full bill with notations of the changes, go here.

    [Gregory Duhl]

    July 21, 2006 in Legislative Developments | Permalink | Comments (0) | TrackBack

    July 14, 2006

    Britain’s Legal Services Bill And The Effect On Capital Wealth In Law Firms

    As we discussed here, in May of this year the British government published a draft bill that would allow lawyers in England and Wales to go into business with non-lawyers. Under the new law, lawyers, accountants, and other professionals would be able to set up so-called “one-stop shops” providing an array of services. Currently, over 50% of the top 100 law firms in the United Kingdom are licensed as limited liability partnerships. Upon passage of the bill, law firms would have the option of being licensed as alternative business structures (“ABSs”), with external, non-lawyer shareholders and stakeholders. According to Colin Ives of Smith & Williamson in the United Kingdon (full commentary provided here), that option could dramatically alter the way that law firms operate in the following manner:

    Professional practices have not been accustomed to attributing value to goodwill built up by their businesses and this has prevented partners from accumulating capital wealth. As a result, generating income has been the priority. The possibility of having external investors on board automatically gives an inherent value to goodwill, which could result in a sea change in attitude. This process could even create a ‘golden generation,’ where partners who have previously enjoyed substantial income seek to convert this into capital value for which there will be a market from both incoming partners and external investors.

    [Gregory Duhl]

    July 14, 2006 in Legislative Developments | Permalink | Comments (0) | TrackBack

    July 06, 2006

    National Conference Of Commissioners On Uniform State Laws This Weekend

    The National Conference of Commissioners on Uniform State Laws will be held in Hilton Head Island starting this Friday July 7 and will run through Friday July 14. Among the proposed uniform laws to be discussed is the Revised Uniform Limited Liability Company Act (2006). The NCCUSL website states that the proposed revised act “identifies the best elements of the ‘first generation’ LLC statutes, and updates those elements into a new ‘second generation’ LLC statute meant to replace older versions currently in place in the states.” The original uniform act was passed in final form in 1996 and can be found on the NCCUSL website.

    For more information on the conference, which is free and open to the public, call (312) 915-0195, or go to www.nccusal.org.

    [Gregory Duhl]

    July 6, 2006 in Legislative Developments | Permalink | Comments (0) | TrackBack