DERIVATIVE SUIT BY LLC 50/50 MANAGING MEMBER

By , June 29, 2017 9:51 am

The post under the link below addresses an interesting Delaware Court of Chancery decision on derivative rules in suits between the two equal managing members of an LLC.  The decision is likely to be influential outside Delaware, and it’s a significant angle on an all-important task for LLC lawyers—handling member deadlocks.

Here’s the link:

https://delawarechancery.foxrothschild.com/derivative-actions/derivative-demand-requirements-equally-apply-to-actions-asserted-by-5050-member-of-an-llc/?utm_source=Fox+Rothschild+-+Delaware+Chancery+Law+Blog&utm_campaign=2c211dbca2-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_86821ff155-2c211dbca2-70733165

MINNESOTA LLC ACT

By , June 26, 2017 9:23 am

Below are the citation and first paragraphs of a article about the soon-forthcoming new version of the Minnesota LLC Act.  The article will of course be of interest to Minnesota lawyers but also to people (like me) who try to follow LLC statutory developments nationwide.

74-JUN Bench & B. Minn. 27
Bench and Bar of Minnesota
May/June, 2017
David Jenson
Copyright © 2017 by Minnesota State Bar Association; David Jenson
WHY YOU MAY NEED AN LLC UPDATE IN 2017

Ready or Not, Minnesota’s LLC Law Changes in January 2018

Many Minnesota LLCs have not yet updated their member control agreements and related documents to accommodate the new realities of a Chapter 322C world, but starting in 2018 that statute will govern all LLCs in the state. This article explores the impact of the change and explains why it’s crucial for businesses to adapt to Chapter 322C on their own terms while there is still time to do so.

For Minnesota LLCs, the clock is ticking to update member control agreements and related documents before a new and different LLC statute automatically applies on January 1, 2018.

Since August 1, 2015, anyone forming a new LLC in Minnesota has confronted the Minnesota Revised Uniform Limited Liability Company Act, also known as Chapter 322C. Minnesota’s new LLC statute differs significantly from the “old” LLC statute, Chapter 322B, but many existing LLCs and their owners have continued under Chapter 322B unaffected by (and perhaps unaware of) this major change and have been spared the necessity of confronting the new law because Chapter 322C currently only applies to newly formed companies and Chapter 322B LLCs that take action to opt in to Chapter 322C.

That all changes in January, when Chapter 322C will automatically apply to all Minnesota LLCs, whether their owners ever intended to be subject to Chapter 322C or not. This article explores the impact of this looming change and posits that it is crucial for businesses to adapt to Chapter 322C on their own terms rather than be forced (perhaps unawares) into Chapter 322C next year.

GRANTS OF RESTRICTED STOCK TO EMPLOYEES

By , June 23, 2017 10:38 am

More and more LLCs are electing to be S corporations, and, as such, can issue restricted stock to their employees under clear tax rules.  However, the new post under the link below raises questions about whether this is ever a good idea.

http://www.taxlawforchb.com/2017/05/restricted-stock-employee-shareholders/

“PROPER PURPOSE”

By , June 19, 2017 8:41 am

When non-manager members have disputes with managers, the access of the non-managers to LLC records is often a key issue.  The issue is whether the non-member members have a “proper purpose” for obtaining those records.  The post under the link below discusses a Delaware Court of Chancery case about that issue.

Here’s the link:  https://delawarechancery.foxrothschild.com/books-and-records-demand-2/chancery-finds-that-mismanagement-exists-warranting-section-220-books-and-records-demand/?utm_source=Fox+Rothschild+-+Delaware+Chancery+Law+Blog&utm_campaign=c83185548b-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_86821ff155-c83185548b-70733165

2017 PROPOSED AMENDMENTS TO DELAWARE’S LLC AND PARTNERSHIP ACTS

By , June 15, 2017 9:41 am

The Delaware Limited Liability Company Act is the most prestigious U.S. LLC act, many sophisticated investors and lenders will deal only with Delaware LLCs, and when two or more LLC founders from non-Delaware states disagree about whose LLC act will govern, they often choose the Delaware Act.  Sophisticated LLC lawyers should have a detailed understanding of the Delaware Act.

The Delaware bar updates the Delaware Act every year to keep it current.  However, as shown in the link below, the updates this year will be quite minor.

http://richardslaytonnews.com/rv/ff00313a50ec119fa779ccd23e4591a53369b557

SELF-EMPLOYMENT TAX OF LLC MEMBERS

By , June 13, 2017 8:45 am

Most multi-member LLCs are taxable as partnerships.  A key task of lawyers forming LLCs is often to minimize the Self-Employment Tax exposure of the members of these LLCs.  The post under the link below discusses a recent Tax Court case addressing the SET liability of the members of a multi-member LLC whose members were lawyers, and it finds that because all of these functioned like general partners of their multi-member LLC, all were liable for that tax.

However, the post does not discuss the usefulness of Prop. Reg. § 1.1402(a)-2 (the “Prop. Reg.”) in protecting from SET liability the members of multi-member LLCs taxable as partnerships.  The IRS has twice stated in public forums that the Prop. Reg. is its audit guideline for the SET liability of partners in entities taxable as partnerships.  Thus, the Prop. Reg. is a powerful tax-avoidance tool for LLC lawyers and their clients.

Here’s the link:  http://www.taxlawforchb.com/2017/06/self-employment-tax-llcs-the-limited-partner-exclusion/

LAW JOURNAL ARTICLE ABOUT CONTRACTING AROUND LLC STATUTE DEFAULT RULES

By , June 6, 2017 12:34 pm

A key task in drafting any LLC operating agreement is to draft provisions in it that validly override default provisions in the governing LLC act that are contrary to your clients’ best interests.  Below are the citation and first paragraph of a law journal article about this process.

42 J. Corp. L. 503
Journal of Corporation Law
Spring, 2017
Article
Peter Molk
Copyright © 2016 by the University of Iowa (The Journal of Corporation Law); Peter Molk
HOW DO LLC OWNERS CONTRACT AROUND DEFAULT STATUTORY PROTECTIONS?

Limited liability companies are built on the idea of contractual freedom. Unlike with other business organization forms, most owner protections apply only by default to LLCs, which are free to waive or modify them as desired. This freedom promises economic efficiency if parties are sophisticated but raises the potential for opportunism by relatively more sophisticated managers and majority owners. While companies ranging from small landscape firms to Chrysler and Fidelity organize as LLCs, remarkably little is known about whether or how LLCs use this contractual flexibility.

I analyze the operating agreements of 283 privately owned LLCs organized under Delaware and New York law to determine when and how parties alter default provisions. I find widespread use of LLC statutes’ flexibility to decrease default owner protections, as well as widespread adoption of owner protections that do not apply by default. There is little evidence, however, that the contractual freedom is used to craft systematically more efficient contractual owner protections. Instead, using a proxy for owner vulnerability, I find that LLCs with more vulnerable owners adopt significantly fewer owner safeguards, suggesting that contractual freedom may be used more often for opportunism and not for efficiency.

ADVICE TO FOUNDERS PLANNING TO SELL THEIR BUSINESSES

By , June 2, 2017 9:19 am

The recent post under the link below contains excellent advise for business founders planning for the eventual sale of their businesses.

http://www.lexology.com/library/detail.aspx?g=848afe49-2075-446b-ab60-4c5e43496045

AMENDING LLC OPERATING AGREEMENTS

By , June 1, 2017 9:26 am

Under the link below is another fine post by Peter Mahler about an issue that, in one form or another, often arises in LLC practice—namely, an issue about the terms governing the amendment of an operating agreement.

Here’s the link:

http://www.nybusinessdivorce.com/2017/05/articles/llcs/delaware-ruling-highlights-difference-new-york-amending-llc-agreements/

ESTATE PLANNING TAX

By , May 25, 2017 8:51 am

The new post under the link below should be read not only by estate planners but also by LLC lawyers who want to think critically about “death taxes.”

http://www.taxlawforchb.com/2017/05/paying-the-estate-tax/