Why Limited Liability Company Membership Interests Should Not be Treated as Securities and Possible Steps to Encourage this Result

Authors

Carol R. Goforth

Abstract

The limited liability company (LLC) is the newest form of business entity in this country. An LLC combines many of the most desirable attributes of a partnership with the most desirable features of the corporate form-most significant of which is limited personal liability for all owners. The recent surge in the popularity of this organization is attributable to a 1988 Internal Revenue Service ruling that an LLC organized under the Wyoming statute was taxable as a partnership. This ruling sparked a virtual race to legislation, with all but six states enacting enabling statutes by mid-1994. Despite its popularity, the LLC is not without potential drawbacks. Currently, tremendous uncertainty surrounds this form of organization because of the lack of case law and legal commentary in the area. Despite the favorable tax treatment afforded to LLCs organized under certain states' legislation, one of the many open issues is whether federal securities laws will apply to membership interests in LLCs.

Professor Goforth analyzes the applicability of the federal securities laws to LLC membership under existing jurisprudence. She also addresses the more important issues of whether those laws ought to apply and what steps can be taken to lead courts to reach the best result. Professor Goforth concludes that although most LLC membership interests should not be classified as securities under existing rules, there is sufficient variation in the LLC form that some membership interests should be classified as securities under current legal doctrines. Accordingly, she offers practical suggestions to planners and drafters of organizational documents which may increase the likelihood that courts will decline to apply the federal securities laws to particular LLC membership interests. Professor Goforth also offers suggestions to legislatures that may be considering enacting LLC statutes or undertaking revision of existing legislation to make it less likely that federal securities legislation will apply to membership interests in LLCs organized under their statutes.

Recommended Citation

Carol R. Goforth, Why Limited Liability Company Membership Interests Should Not be Treated as Securities and Possible Steps to Encourage this Result, 45 Hastings L.J. 1223 (1994).
Available at: https://repository.uclawsf.edu/hastings_law_journal/vol45/iss5/2