State Law and Uniform Limited Liability Company Act
Statute of the state, where a limited liability company is domiciled, governs the entity. Many of the state laws on limited liability companies are on the lines of the Uniform Limited Liability Company Act. State law and Uniform Limited Liability Company Act are closely related. Widely held limited liability companies with investors scattered in different states are generally, in addition, subject to the provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.
In 1994 the National Conference of Commissioners on Uniform State Laws (NCCUSL) adopted the Uniform Limited Liability Company Act, which was amended in 1995. Many of the provisions of the said Uniform Act have already been adopted by different states in state laws. Yet the limited liability company law of any state or jurisdiction may vary considerably from the Uniform Act.
In case where a member’s interest in a limited liability company is an investment contract, then the same is deemed to be a ‘security’ subject to federal and state securities law.
An investment contract is an investment in a common enterprise with the expectation of making profits wholly from the efforts of others.
In a closely held limited liability company, where all members play an active role in the functioning of the organization, the interest of a member is usually not considered a ‘security’.
However, the interest of an investor in a widely held limited liability company, with centralized management, whose shareholders are dispersed across different states, is a ‘security’. Accordingly such interest is subject to both federal and state securities laws.
