Limited liability companies and the Bankruptcy Code

Article Abstract:

The fact that limited liability companies (LLCs) combine corporate and partnership characteristics makes the application of bankruptcy law to LLCs challenging, and the Bankruptcy Code provides little guidance because LLCs are so new. LLCs must be considered either a partnership or a corporation to qualify for bankruptcy treatment, but partnership characterization could threaten limited liability and corporate treatment limits involuntary petition rights. Personal bankruptcy filing by an LLC member raises issues regarding the bankruptcy trustees ability to assume the operating agreement.

Interpretation and construction, Bankruptcy law

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The New York Limited Liability Company Law: classification and conversion issues

Article Abstract:

The New York Limited Liability Company Law, enacted in July 1994, will provide business entities with limited liability and partnership taxation if IRS entity characterization rules are met. Under IRC section 7701, an entity will be treated as a corporation, and subject to entity-level taxation, if it possesses at least three of these four characteristics: continuity of life, limited liability, free transferability and centralization of management. The New York statute is structured so that entities conforming to the statute's guidelines will receive favorable tax treatment.

Taxation

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Treatment of recourse liabilities in the context of a limited liability company

Article Abstract:

IRC sections 752 and 1001 are irreconcilable when applied to recourse debt incurred by limited liability companies (LLCs). No personal liability results from liabilities entered into by an LLC, so debts held by LLCs are effectively nonrecourse debts, unless an LLC member has voluntarily consented to personal liability. Application of the recourse and nonrecourse debt classification rules of sections 752 and 1001 leads to contradictory results. Congress needs to revise these rules to identify all such debt incurred by LLCs as nonrecourse.

Accounting and auditing, Loans

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