Problems of Dealing with Limited Liability Company Interests(originally published in the Fall 2011 Edition of NABTALK, the Journal of the National Association of Bankruptcy Trustees)

Trustees are often faced with reviewing Debtors’ interests in businesses. As the tax benefits of pass-through entities became more popular, Debtors chose the Subchapter “S” Corporation (“S-Corporations”) format for their businesses. However, there were restrictions regarding the nature and number of shareholders in S-Corporations and the number of classes of stock ownership. The Limited Liability Company (“LLC”) became the answer to the S­Corporation restrictions, since LLCs did not have to conform to all such restrictions.

Unlike corporations or partnerships, LLCs present unique issues. LLCs are formed by filing Articles of Organization with the appropriate state government agency on a prescribed form. The governance of the LLC is typically set forth in an Operating Agreement. The LLC can be managed by its members or a manager. If the LLC is run by a manager, the role of a Bankruptcy Debtor Member may become just a passive activity, simply waiting for periodic distributions from the LLC, provided it is profitable.

Read More