By , May 4, 2015 2:56 pm

Not only in representing clients in post-formation disputes under LLC operating agreements but also in drafting these agreements, it is important to have a clear understanding of the rules that sophisticated courts are likely to apply in construing operating agreement  provisions when the parties disagree about their meaning.  As noted in the attached post in the Morris James Delaware Business Litigation Report blog, the April 29, 2015 decision of the Delaware Court of Chancery in Hampton v. Turner provides a good catalogue of these rules as applied to the facts in that case and, more specifically, to the relevant provisions of the governing limited liability company agreement (the term for “operating agreement” under the Delaware Limited Liability Company Act).  The link to the post is:



By , May 1, 2015 1:40 pm

The facts in In re Carlisle Etcetera, decided by the Delaware Court of Chancery today, are complicated, but the key issue in the case is whether the petitioner, a “mere assignee” of the membership of one of the two equal original members, may rely on equity to seek a dissolution of the LLC when the law, as such, permits only members to do so.  The court held for the petitioner on equitable grounds.  The law firm representing the petition was Proctor Heyman Enerio LLP.  Vern Proctor, the co-author of Drafting Limited Liability Company Operating Agreements, is the “Proctor” in that firm.  (Vern handles all Delaware LLC issues in the book; I handle all other issues.)

The broad lesson of the case is that in appropriate circumstances, equity must trump law in LLC internal disputes.  The discussion in the opinion about of equity and when it should and shouldn’t apply in such disputes is remarkably clear and remarkably learned.

If, like me, you represent clients in LLC internal disputes from time to time, you should study  the opinion in In re Carlisle Etcetera carefully.  Here is a link to the opinion:



By , April 30, 2015 2:08 pm

The implied contractual covenant of good faith and fair dealing is a central doctrine in drafting and construing LLC operating agreements.  However, the post under the link below discusses yet another Delaware Supreme Court case limiting the scope of the covenant—namely, the case of Lazard Technology Partners LLC, decided on April 23, 2015.  My belief is that these decisions are likely to persuasive in most or all non-Delaware courts.

Here’s the link:


Below is a link to another blog post on the Delaware Supreme Court Lazard case on the implied contractual covenant of good faith and fair dealing.  The link contains a useful LLC operating agreement drafting tip.

Here’s the link:



By , April 29, 2015 6:12 pm

A brief follow-up to the post I published earlier about the above subject:  Under PLR 200022016 and other federal tax authorities, the above conversions do not trigger any federal tax consequences as long as, connection with such a conversion, there are no internal adjustments among the members, such as shifts of liabilities; for federal tax purposes, the converting partnership is the same partnership after the conversion as before.

Here is the link to PLR 200022016:  http://www.irs.gov/pub/irs-wd/0022016.pdf.


By , April 29, 2015 2:04 pm

There are probably many tens of thousands of state-law general partnerships doing business today in the U.S.  The state-law general partnership business organization form is a very dangerous one, since, under the general partnership statutes of most or all states, each partner is jointly and severally liable for claims against the partnership and against every other partner.  Indeed, it is often suggested that for a lawyer to form a state-law general partnership would be malpractice per se.

Thus, if you have any clients that do business as general partnerships, you should urge them to make conversions—preferably, statutory conversions if your state laws permit—to LLCs; or at the very least to register as limited liability partnerships (thus providing a liability shield to each partner).  If you’re a lawyer, it can be argued that your failure to do so would be malpractice per se.

Under the Check-the-Box Regulations, the above conversions are non-events from a federal tax viewpoint for entities that are general partnerships taxable as partnerships for federal income tax purposes, since such an entity is the same partnership for federal tax purposes after the conversion as before.  Furthermore, the conversion should not trigger any state transfer tax, since only a single entity is involved in the conversion.  An entity can’t make a transfer to itself.

This obvious conclusion about the inapplicability of state transfer taxes to conversions of state-law general partnerships to LLCs was recently confirmed for New Hampshire Real Estate Transfer Tax purposes in a New Hampshire Department of Revenue Administration Declaratory Ruling 10799, effective March 19, 2015.  Click here for this ruling:  http://revenue.nh.gov/tirs/documents/abc-dcr.pdf.

The ruling is an important one in New Hampshire, since the RETT applies at an aggregate rate of 1.5% of fair market value of the relevant real property.


By , April 28, 2015 2:32 pm

In the excellent new post by Peter Mahler under the link below. Peter discusses a fascinating New York common law rule called the “squabbling partners” rule.  Under this rule, partners can’t bring claims against one another unless they include a dissolution count in their claim.   The inclusion of such a rule in an LLC operating agreement might be a powerful means of preventing members from bringing claims against one another unless they are deadly serious claims that the claimants feel they absolutely must make, even if the result of the claims will be the liquidation of the LLC.

Here is the link:



By , April 27, 2015 3:51 pm

The article under the link below summarizes the major federal income tax developments of 2014 not only in the field of LLC taxation but in all other federal income tax areas as well.  But its summary of partnership tax developments is particularly relevant to LLC tax, since most multi-member LLCs are taxable as partnerships.  The title and citation of the article are McMahon, McGovern and Shepard, Recent Developments in Federal Income Taxation: The Year 2014 (Florida Tax Review, Vol. 17, No. 3, 2015)

Here’s the link:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2569359


By , April 24, 2015 2:32 pm

The ABA has just published online the latest edition of Business Law Today, its informal but excellent business law journal.  Below is a link to the table of contents of the edition.  The article most relevant to LLCs is the one on META, which provides uniform rules for all of a state’s various business organizations—corporations, LLCs, etc.—for common transactions such as mergers and domestications.  Eventually, we’ve got to get around to adopting META in New Hampshire.  But it will be a lot of work for New Hampshire statutory drafters.

Here’s the link:  http://www.americanbar.org/publications/blt/2015/04.html


By , April 23, 2015 1:50 pm

As I’ve noted before in this listserv, when LLC members want to minimize their Self-Employment Tax on their shares of LLC income, the best option is often to make an S election.  One of my LLC clients recently filed a Form 1120S for 2014, but had never made the necessary S election and thus, under the default rules of the Check-the-Box Regulations, was a partnership for federal income tax purposes.  The IRS sent them a nastygram about this failure.  One or more of your clients may someday commit a similar failure.  If they do, you should tell them that the IRS is pretty liberal in accepting late elections.  See the very recent IRS private letter ruling under the following link:  http://www.irs.gov/pub/irs-wd/201515021.pdf.


By , April 22, 2015 2:33 pm

As many of you will know, the Joint Committee on Taxation is a highly expert federal tax committee of the U.S. Congress.  On April 10, 2015, it published what, for me, at least, is a fascinating report entitled “Choice of Business Entity:  Present Law and Data Relating to C Corporations, Partnerships and S Corporations.”  The report contains an excellent comparison among the basic provisions of Subchapter C, Subchapter S and Subchapter K on various key federal income tax issues.  It also contains a lot of, to me, at least, fascinating information about non-farm and farm sole proprietorships.  If you want to take a look at the report and possibly download it, click here:  https://www.jct.gov/publications.html?func=startdown&id=4765.