Articles Tagged with LLC

Time-for-Legal-services-160137293_725x483-1-300x200As we discussed in our prior update, a federal court in Texas has issued a preliminary injunction against the Corporate Transparency Act (CTA) reporting requirement, the Beneficial Ownership Information Report (BOIR).  (You may recall that the CTA requires companies created before 2024 to file BOIRs before January 1, 2025; new companies formed in 2024 to file within 90 days of their creation; and new companies formed after 2024 to file within 30 days of their creation.)  

The Financial Crimes Enforcement Network (FinCEN) has issued a statement that all reports during the preliminary injunction are considered “voluntary” and there will be no penalty for reporting companies who fail to file during that period. In their statement, FinCEN maintains that they believe the CTA is constitutional and vital in protecting the United States and its citizens from financial and other crimes. 

What does this statement mean, if anything, for your small business?  

Gold-Gavel-photo-credit-by-pixaby-300x165The Corporate Transparency Act (CTA) requires most small business corporations and limited liability companies to file Beneficial Ownership Information Reports (BOI reports or BOIRs) with the Financial Crimes Enforcement Network (FinCEN), a part of the United States Department of Treasury.  The purpose of the reports is to give law enforcement information regarding the people who own or control companies that may not otherwise be available to them, primarily for the purpose of investigating money laundering and other financial crimes.  For companies that were formed before January 1, 2024, BOIRs are due by January 1, 2025.

 At least they were before this week. On December 3, the United States District Court for the Eastern District of Texas in Texas Top Cop Shop, Inc. v. Garland (civil action number 4:24-CV-478) ruled that the CTA is likely unconstitutional and issued a nationwide preliminary injunction prohibiting the enforcement of the BOIR requirement. In doing so, the court wrote, “[R]eporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.”

For several reasons, this is not the last word on the CTA.  First, the Government has already appealed the decision to the U.S. Court of Appeals for the Fifth Circuit, which could set aside the preliminary injunction.

What is an Anonymous LLC? 

suspicious-young-man-peeking-and-looking-at-camera-through-blinds-mistrust-concept-1124692168_726x484-300x200An anonymous LLC (limited liability company) is a type of business structure in which the public has no access to the owners’ identities. This means that the names of the members (owners) and managers (if any) of the LLC are not listed on records that are available to the public.   

Even though the members and managers are anonymous to the public, they are not anonymous to certain government agencies or to law enforcement. For example, the LLC’s tax returns filed with the IRS and other tax authorities list the names of its members. In addition, a new report that became mandatory this year for most LLCs, called a Business Ownership Information Report, discloses the names of most members and managers to the Financial Crimes Enforcement Network or FinCEN. 

suspicious-young-man-peeking-and-looking-at-camera-through-blinds-mistrust-concept-1124692168_726x484-300x200You may have heard of a new reporting requirement that took effect on January 1, 2024, under the federal Corporate Transparency Act (or CTA). The report is called a Business Ownership Information Report (or BOIR). Most limited liability companies (LLCs), corporations, and other types of business entities are now required file a report with the Financial Crimes Information Center (or FinCEN) disclosing the names of the people who, directly or indirectly, own or control the business entity. A wealth of information regarding the CTA and BOIRs is available at the BOIR home page at https://www.FinCEN.gov/boi; the Small Entity Compliance Guide at https://www.FinCEN.gov/boi/small-entity-compliance-guide; and the list of frequently asked questions at https://www.FinCEN.gov/boi-faqs#A_1. Some basic information is provided below.

What is the purpose of the CTA?

The purpose of the Corporate Transparency Act, passed by Congress in 2021 on a bipartisan basis, is to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures. The BOIR provides law enforcement with information that may not otherwise be readily available to them.

Form of Inventory of Probate AssetsOn March 13, 2024, the Indiana Governor signed Senate Enrolled Act 18, which, among other things, amends the Indiana Business Flexibility Act with the goal of addressing problems that can arise from the death of the sole member of a limited liability company. The following article is based on our analysis and understanding of SEA 18, particularly Sections 2 and 3.

Basic LLC Principles: Interest versus Membership

Understanding SEA 18 requires an understanding of the difference between LLC interest and membership.

iStock-1288715721-300x181Generally, an Indiana limited liability company that has no members is dissolved. Ind. Code § 23-18-9-1.1(c). (For an interesting case from Alabama involving the dissolution of an LLC for lack of members, see our Indiana Law Blog article, Family Businesses:  Succession Planning for LLCs.) Although that provision is in the chapter entitled “Voluntary Dissolution,” it is really not voluntary at all. It is really a statutory dissolution that occurs automatically, and it can be triggered by several different events that result in the dissociation of a sole, or last remaining, member.

There are, however, two exceptions to the statutory dissolution of an LLC with no members. First, the LLC will not be dissolved if the operating agreement provides specifically for the admission of a member after the dissociation of a sole or last remaining member, and a member is actually admitted under that provision within 90 days of the first date the LLC had no members. In our experience, very few operating agreements contain such a provision.

The second exception applies if the reason the LLC has no members is the death of the sole or last remaining member.  In that case, the LLC is not dissolved if the operating agreement provides for the member’s personal representative, or the personal representative’s designee, to be admitted as a member and that person is admitted within 90 days of the member’s death.  See Ind. Code 23-18-6-5(a)(4).  Again, it is safe to say that few operating agreements have such provisions.  Moreover, even if one exists, there is a significant possibility that no member will be appointed before the 90 day window closes.

The limited liability company is a relatively new form of business entity, with most state statutes adopted in the 1990s. In just a few years, they overtook the corporation as the most common structure for new businesses.  A reason for the LLC’s popularity is that the it combines some of the most desirable aspects of corporations with some of the most desirable aspects of partnerships, but that blending of characteristics can also be a source of confusion.  For example, LLCs work much like partnerships when it comes to ownership rights, but people often incorrectly assume ownership that LLC interest is analogous to corporate stock and that LLC membership is analogous to being a corporate shareholder.

The owners of corporations are called shareholders and their ownership rights are embodied in shares of stock, a form of intangible personal property comprising a bundle of rights, some economic and some non-economic.  The principal economic right is the right to receive dividends (usually cash) from the corporation, and the principal non-economic right is the right to vote in an election of directors and other matters that may be submitted to a vote of the shareholders. Although there can be restrictions (typically set out in the company’s articles of incorporation or bylaws, or a contract among shareholders or between a shareholder and the corporation), stock is generally transferable from one person to another. A person who acquires stock (thus becoming a shareholder) receives both sets of rights, economic (dividends) and non-economic (voting). It makes no difference how the person acquires the stock –by purchase, by gift, by inheritance, as compensation to an employee, or by court order (in a divorce or otherwise); a person who owns stock holds both economic and non-economic rights.

Limited liability companies also have economic and non-economic rights.  The principal economic right is the right to receive distributions (usually cash) from the company, and the principal non-economic right is the right to participate in the management of the company’s business and affairs. A crucial distinction between LLCs and corporations is that the economic and non-economic rights associated with LLCs are not bundled together in a single package the way those rights in a corporation are bundled together in stock.

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