Limited Liability Company Act

by Holly Keeran
Until 2008, the creation of limited liability companies was guided solely by unique state statutes.

Until 2008, the creation of limited liability companies was guided solely by unique state statutes.

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In 1977, Wyoming enacted the first Limited Liability Company Act in the United States. Because of the Internal Revenue Service’s wavering on the classification of LLCs for tax purposes, the remaining states hesitated to adopt similar statutes, seeking a definitive ruling from the IRS regarding the tax treatment of a noncorporate entity providing limited liability to its owners. In 1997, the IRS declared that any noncorporate entity could “self classify,” or choose to be taxed either as a corporation or as a partnership.

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In contrast to a partnership, an LLC’s existence cannot simply be implied or asserted. The formation and existence of an LLC can only proceed as dictated by statute. Each state’s LLC statute provides the rules and regulations for this formation. An LLC statute encompasses several elements, many of which vary from state to state.

State Statutes

By 1997, each state and the District of Columbia had enacted its own LLC statute. The different state statutes diverge considerably on certain practical concepts from one another. Although the effect of this lack of uniformity on the development and operation of LLCs remains undetermined, the diversity of the statutes does affect such activities as multistate dealings, e.g., the recognition of out-of-state LLCs, the extent of fiduciary duties and the governance of relations with foreign LLCs.

1996 Model Statute

As no federal statute existed to address the inconsistencies of the multiple state statutes, the National Conference of Commissioners on Uniform State Laws initiated a conference and developed and promulgated the Uniform Limited Liability Company Act in 1994. In 1995, the NCCUSL amended the act to comply with new IRS announcements regarding the classification of an LLC, and in 1996 it added a final amendment in anticipation of the 1997 IRS self-classification ruling. The NCCUSL declares that the adoption of the ULLCA “will provide much needed consistency among the states, [providing] flexible default rules, multistate recognition of limited liability on the part of company owners and promoting the development of precedential case law."

State Resistance

Although many of the states found it necessary to significantly amend their own LLC statutes over time, none of the states or the District of Columbia adopted the ULLCA. With annual LLC filings outnumbering new corporate filings, an increasing number of states dealing with mergers involving LLCs and various unincorporated entities, and confusion involving manager-managed and member-managed LLCs, the NCCUSL resolved to take another swing at standardizing the LLC statutes.

2006 Model Statute

The resulting modifications by the NCCUSL to the 1996 Act came in the form of the Revised Uniform Limited Liability Company Act. Adopted and recommended for enactment by NCCUSL in 2006, the revised Act addressed many of the conflicting features still found in the state LLC statutes at that time. Concentrating on developments over the last decade, the 2006 Act more specifically defines rules and conduct of the LLC by providing default rules with regard to issues such as operating agreements, fiduciary requirements and contract rights.

State Adoption

Although the revised model statute (RULLCA) was not endorsed by the Idaho State Bar, in March 2008, Idaho became the first state to adopt it. As of June 2010, Iowa, Nebraska and Wyoming had followed Idaho’s lead and passed the revised statute. Legislatures in New Jersey and the District of Columbia introduced RULLCA in 2010.