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Planning & Drafting for Wyoming Close LLCs
Scottsdale, AZ October 2010
Cecil Smith & Carol Gonnella
1Copyright 2007 - 2010, Cecil Smith & Carol Gonnella
Copyright 2007 - 2010, Cecil Smith & Carol Gonnella 2
The Wyoming Close LLC• 2 Sets of LLC statutes
– WS § 17-29-101 thru 1105 became law on July 1, 2010
– WS § 17-25-101 thru 136 • The Close LLC Supplement – 2000
Arizona Law
• The Court MAY charge the member’s interest (the Charging Order)
• The Judgment Creditor has the rights of an Assignee
• This is the EXCLUSIVE REMEDY
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• Ease of Administration• Creditor Protection• Discounting of Value• Purpose: For Any Reason other than
forming a bank or insurance company
The Wyoming Close LLC
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Creditor Protection is the main reason practitioners create LLCs for their Clients
Creditor Protection
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Two Primary Sources of Threat:
1) Creditors of the Entity – “Inside Lawsuits”
2) Creditors of a Member – “Outside Lawsuits”
Wyoming Creditor Protection
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1) Charging Order2) Foreclosure3) Dissolution4) Appointment of Receiver5) All other remedies a Judgment
Debtor may have had
Possible Remedies for a Court to Order
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The Charging Order is the EXCLUSIVE REMEDY by which a person seeking to enforce a judgment against a judgment debtor ...
New Statute Wyoming Creditor Protection Law
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…including any judgment debtor who may be the SOLE MEMBER of the LLC
New StatuteWyoming Creditor Protection Law
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Other remedies, including foreclosure and a court order for directions, accounts and inquiries that the judgment debtor might have made ARE NOT AVAILABLE and may NOT be ordered by the Court
New Statute Wyoming Creditor Protection Law
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1. The Court MAY charge the LLC Interest … The Charging Order
2. The Court MAY appoint a Receiver
3. The Court MAY order Foreclosure
4. The Court MAY make all other orders, directions, accounts and inquiries the judgment debtor might have made or the circumstances require
California Law
Illinois Law
Similar to California. The Court:
1. MAY issue a Charging Order against the member’s interest;
2. MAY appoint a receiver;
3. MAY make all other orders, directions, accounts and inquiries the judgment debtor might have made;
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Illinois Law -- continued
4. MAY make other orders the circumstances may require to enforce the Charging Order.
5. The Charging Order constitutes a LIEN on the debtor’s interest. The Court may order a foreclosure on the lien of the judgment debtor’s interest.
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The Charging Order is the EXCLUSIVE REMEDY.
However, a judgment creditor has the rights of an assignee. This may allow an assignee to get to the books and records of the LLC.
Nevada Law
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Delaware Law
• The Charging Order is the EXCLUSIVE REMEDY … and the Charging Order
constitutes a LEIN on the debtor-member’s interest in the LLC.
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Valuation Adjustmentsor “Discounting”
The Value of an ownership interest in a business entity may be significantly
different from the proportionate value of the specific assets held in the business entity.
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Value is Adjusted for:
• Lack of Marketability• Lack of Control• Minority Interests • Fractionalized Interests
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What Do Business Appraisers Look At?
• The FMV of the business
as if NOT in an LLC
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What Do Business Appraisers Look At?
Restrictions in the Operating Agreement regarding:
1. Members 2. Managers 3. Withdrawal 4. Dissolution &5. Transferability of Ownership
Interests
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What Do Business Appraisers Look At?
Restrictions under State Law regarding:1. Members 2. Managers 3. Withdrawal 4. Dissolution &5. Transferability of Ownership
Interests
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Excessive Restrictions
• IRC Section 2704 (b)–A liquidation restriction in a LLC
will be disregarded if it is more restrictive than the default rule under state law.
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Excessive Restrictions
–Thus, we must review state statutes for the default provisions for a member’s right to withdraw or dissolve the LLC
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California LawMember Withdrawal Rights
Default Provision:
A member may withdraw from an LLC at any time by giving written notice to the other members.
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Nevada LawMember Withdrawal Rights
Default Provision:
A member may not withdraw or resign before the dissolution or winding up of the company. However, if member has a right to withdraw, he has the right to receive the fair market value of his interest in the company on the date of withdrawal.
Arizona Law
• A member may withdraw from an LLC at any time upon the mailing and delivering written notice of withdrawal to the other members
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Wyoming LawMember Withdrawal Rights
Default Provision:
A member may withdraw only with the consent of all other members of the company.
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Wyoming LawReturn of Contributions
A member shall not receive out of LLC property any part of his contribution to capital unless:
1. All members consent to such return of capital contributions; or
2. The company is dissolved
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Wyoming LawNature of Contributions
In the absence of the consent of all members of the LLC to return capital, a member has only the right to demand and receive cash in return for his capital contribution.
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Wyoming LawIf Member Fails to Receive Capital
A member may not have the company dissolved for the failure of the LLC to return his capital contribution.
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Nevada LawMember’s Right
to Demand Dissolution
Default Provision:
No member can dissolve without the consent of ALL members
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CA Law -- Member’s Right to Demand Dissolution
An LLC shall be dissolved upon:–A vote of a majority in interest;–An action filed by any member or
manager;–Upon the petition of three or more
creditors if it appears necessary for the protection of any parties in interest.
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Delaware Law – Member’s Right to Demand Dissolution
Default Provision --- Upon the consent of two-thirds of the members, the LLC may be dissolved
Arizona Law
• An LLC may be dissolved upon the written consent to dissolve by more than one-half of the members and by one or more members who on dissolution and liquidation of the assets would be entitled to receive more than one-half the value of the assets.
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Wyoming Law -- Members Right to Demand Dissolution
Default Provision:
Unanimous Agreement is Required of all members.
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California’s FeesFiling Fee
$800 Annual Fees: $800 per year
PLUS California has a Franchise Tax on Total Annual Income
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Nevada’s Fees & Reporting Filing Fee:
$75
Annual Fees of $125 per year which must include list of managers’ names & addresses under penalty of perjury PLUS
$200 for annual business license which requires names, addresses & SS#s of all managers & members
TOTAL OF $325 per year.
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Wyoming’s Fees & Reporting
Filing Fee:$100
Annual Fees:
Lesser of $50, or
2/10 of one mill on the dollar ($.0002) on all assets employed or put to use in Wyoming.
AND no disclosure of members or managers.
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Bankruptcy Issues
Bankruptcy Courts are Divided on the Protection of LLCs_________________________________________________________________________________________________________
• Single Member LLCs• In Re Ashley Albright (CO); In Re Modanlo (MD); • A-Z Electronics, LLC (ID);
• Multiple Member LLCs• Cognex Corp v. VCode Holdings, Inc (MN); In Re Ehmann
(AZ)
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Three Lines of Defense to the Bankruptcy Cases:
1. Use a well drafted Operating Agreement making it an executory contract
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2. Select a jurisdiction with
strict requirements for
● withdrawal and
● dissolution
Three Lines of Defense:
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3. Select a jurisdiction where creditor rights are very limited by State Statute
Three Lines of Defense:
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TETON AGENTS, LLC
A Wyoming company serving as Registered Agent for your Wyoming LLCs.
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WYOMING: The Business Friendly State
Four out of the past 5 years, Wyoming has been awarded the distinction of being the best state in the country for business friendliness by the Tax Foundation, a nonpartisan, nonprofit organization that monitors fiscal policy since 1937
DRAFTING TIPS
1. Make your Operating Agreement an executory agreement. We do this by saying you become a mere assignee if you do not make a capital call.
44Copyright 2007 - 2010, Cecil Smith & Carol Gonnella
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DRAFTING TIPS
2. In your Operating Agreement require unanimous consent of all members regarding withdrawal or dissolution.
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DRAFTING TIPS
3. In your Operating Agreement provide that the LLC will be Manager-Managed, rather than Member-Managed.
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DRAFTING TIPS
4. In your Operating Agreement provide for Crummey withdrawal powers to be sure gifts of LLC units will qualify as gifts of as present interest.
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DRAFTING TIPS
5. In your Operating Agreement provide for a strategy, plan and philosophy for investing cash or liquid assets. Maybe put this in the “purpose section.”
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ADDITIONAL TIP
Regarding the Timing of Gifts
Provide some reasonable time between the funding of the LLC before gifts or sale of units are made.
•
50Copyright 2007 - 2010, Cecil Smith & Carol Gonnella
Thank You!
Cecil & Carol
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