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Planning & Drafting for Wyoming Close LLCs Planning & Drafting for Wyoming Close LLCs Scottsdale, AZ October 2010 Cecil Smith & Carol Gonnella 1Copyright.

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Presentation on theme: "Planning & Drafting for Wyoming Close LLCs Planning & Drafting for Wyoming Close LLCs Scottsdale, AZ October 2010 Cecil Smith & Carol Gonnella 1Copyright."— Presentation transcript:

1 Planning & Drafting for Wyoming Close LLCs Planning & Drafting for Wyoming Close LLCs Scottsdale, AZ October 2010 Cecil Smith & Carol Gonnella 1Copyright , Cecil Smith & Carol Gonnella

2 2 The Wyoming Close LLC 2 Sets of LLC statutes –WS § thru 1105 became law on July 1, 2010 –WS § thru 136 The Close LLC Supplement – 2000

3 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

4 Copyright , Cecil Smith & Carol Gonnella4 Ease of Administration Creditor Protection Discounting of Value Purpose: For Any Reason other than forming a bank or insurance company The Wyoming Close LLC

5 Copyright , Cecil Smith & Carol Gonnella5 Creditor Protection is the main reason practitioners create LLCs for their Clients Creditor Protection

6 Copyright , Cecil Smith & Carol Gonnella6 Two Primary Sources of Threat: 1)Creditors of the Entity – “Inside Lawsuits” 2)Creditors of a Member – “Outside Lawsuits” Wyoming Creditor Protection

7 Copyright , Cecil Smith & Carol Gonnella7 1)Charging Order 2)Foreclosure 3)Dissolution 4) Appointment of Receiver 5) All other remedies a Judgment Debtor may have had Possible Remedies for a Court to Order

8 Copyright , Cecil Smith & Carol Gonnella 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 New Statute Wyoming Creditor Protection Law

9 Copyright , Cecil Smith & Carol Gonnella9 …including any judgment debtor who may be the SOLE MEMBER of the LLC New Statute Wyoming Creditor Protection Law New Statute Wyoming Creditor Protection Law

10 Copyright , Cecil Smith & Carol Gonnella 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 New Statute Wyoming Creditor Protection Law

11 Copyright , Cecil Smith & Carol Gonnella11 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

12 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; 12Copyright , Cecil Smith & Carol Gonnella

13 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. Copyright , Cecil Smith & Carol Gonnella13

14 Copyright , Cecil Smith & Carol Gonnella 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

15 Copyright , Cecil Smith & Carol Gonnella 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.

16 Copyright , Cecil Smith & Carol Gonnella16 Valuation Adjustments or “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.

17 Copyright , Cecil Smith & Carol Gonnella Value is Adjusted for: Lack of Marketability Lack of Control Minority Interests Fractionalized Interests

18 Copyright , Cecil Smith & Carol Gonnella18 What Do Business Appraisers Look At? The FMV of the business as if NOT in an LLC

19 Copyright , Cecil Smith & Carol Gonnella19 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

20 Copyright , Cecil Smith & Carol Gonnella20 What Do Business Appraisers Look At? Restrictions under State Law regarding: 1.Members 2.Managers 3.Withdrawal 4.Dissolution & 5.Transferability of Ownership Interests

21 Copyright , Cecil Smith & Carol Gonnella21 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.

22 Copyright , Cecil Smith & Carol Gonnella22 Excessive Restrictions –Thus, we must review state statutes for the default provisions for a member’s right to withdraw or dissolve the LLC

23 Copyright , Cecil Smith & Carol Gonnella23 California Law Member Withdrawal Rights Default Provision: A member may withdraw from an LLC at any time by giving written notice to the other members.

24 Copyright , Cecil Smith & Carol Gonnella24 Nevada Law Member 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.

25 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

26 Copyright , Cecil Smith & Carol Gonnella26 Wyoming Law Member Withdrawal Rights Default Provision: A member may withdraw only with the consent of all other members of the company.

27 Copyright , Cecil Smith & Carol Gonnella27 Wyoming Law Return 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

28 Copyright , Cecil Smith & Carol Gonnella28 Wyoming Law Nature 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.

29 Copyright , Cecil Smith & Carol Gonnella Wyoming Law If Member Fails to Receive Capital A member may not have the company dissolved for the failure of the LLC to return his capital contribution.

30 Copyright , Cecil Smith & Carol Gonnella30 Nevada Law Member’s Right to Demand Dissolution Default Provision: No member can dissolve without the consent of ALL members

31 Copyright , Cecil Smith & Carol Gonnella31 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.

32 Copyright , Cecil Smith & Carol Gonnella32 Delaware Law – Member’s Right to Demand Dissolution Default Provision --- Upon the consent of two-thirds of the members, the LLC may be dissolved

33 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.

34 Copyright , Cecil Smith & Carol Gonnella34 Wyoming Law -- Members Right to Demand Dissolution Default Provision: Unanimous Agreement is Required of all members.

35 Copyright , Cecil Smith & Carol Gonnella California’s Fees Filing Fee $800 Annual Fees: $800 per year PLUS California has a Franchise Tax on Total Annual Income

36 Copyright , Cecil Smith & Carol Gonnella Nevada’s Fees & Reporting Filing Fee: $75 Annual Fees of $125 per year which must include l ist 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.

37 Copyright , Cecil Smith & Carol Gonnella37 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.

38 Copyright , Cecil Smith & Carol Gonnella38 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)

39 Copyright , Cecil Smith & Carol Gonnella39 Three Lines of Defense to the Bankruptcy Cases: 1. Use a well drafted Operating Agreement making it an executory contract

40 Copyright , Cecil Smith & Carol Gonnella40 2. Select a jurisdiction with strict requirements for ● withdrawal and ● dissolution Three Lines of Defense:

41 Copyright , Cecil Smith & Carol Gonnella41 3. Select a jurisdiction where creditor rights are very limited by State Statute Three Lines of Defense:

42 Copyright , Cecil Smith & Carol Gonnella42 TETON AGENTS, LLC A Wyoming company serving as Registered Agent for your Wyoming LLCs.

43 Copyright , Cecil Smith & Carol Gonnella43 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

44 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 , Cecil Smith & Carol Gonnella

45 45 DRAFTING TIPS 2. In your Operating Agreement require unanimous consent of all members regarding withdrawal or dissolution.

46 Copyright , Cecil Smith & Carol Gonnella46 DRAFTING TIPS 3. In your Operating Agreement provide that the LLC will be Manager- Managed, rather than Member- Managed.

47 Copyright , Cecil Smith & Carol Gonnella47 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.

48 Copyright , Cecil Smith & Carol Gonnella48 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.”

49 Copyright , Cecil Smith & Carol Gonnella49 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.

50 50Copyright , Cecil Smith & Carol Gonnella Thank You! Cecil & Carol


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