Joseph M. Jarvishttps://tallgrasslegal.com/jjarvis@tallgrasslegal.com

Update on Kansas Business Entity Law

Brown Bag CLE

Douglas County Bar Association

February 19, 2015

© Copyright 2015 Tallgrass Legal LLC. All rights reserved.

Acknowledgments

Webb Hecker, KU Law

Bill Matthews, Foulston Siefkin

Bill Quick, Polsinelli

Virginia Harper Ho, KU Law

Joe Molina, KBA

What’s New in Kansas Business Entity Law 2012: Series LLCs

2014: Revised Limited Liability Company Act (KRLLCA)

2014: Business Entity Standard Treatment (BEST) Act

2015? BEST Act Fixes & Revisions

2016? Benefit Corporations

2016? Revised General Corporation Code (KGCC)

Business Entity Refresher

Partnerships Pre 1800s Unlimited liability Pass-through taxation Control vested in each partner Common law creation; partnership agreements common K.S.A. 56A-101 et seq. Modeled on Delaware

Business Entity Refresher

Corporations 1800s-1900s Limited liability Double taxation Control generally vested in a board Statutory formalities K.S.A. 17-6001 et seq. Modeled on Delaware

Business Entity Refresher

Limited Liability Companies (LLCs) 1970s+ Limited liability Pass-through taxation Flexible control Fewer statutory formalities; freedom of contract K.S.A. 17-7662 et seq. Modeled on Delaware

Business Entity Refresher

Kansas tradition of following Delaware business law

Most states do NOT do this

Series LLCs

Each series is independent cell within LLC

Intended to allow segregation of assets while preserving a common link.

Example uses Investment funds Captive insurance Real estate

Series LLCs

Delaware majority approach (adopted 1996)

Illinois minority approach (adopted 2005)

Kansas adopted Illinois model (adopted 2012) See K.S.A. § 17-76,143

Series LLCs

Is a series a separate legal entity (juridical person)? Delaware: No Illinois: Depends, look for an election in articles of

organization; see 805 ILCS § 180/37-40(b) Kansas: Same as Illinois; see K.S.A. § 17-76,143(a)

Series LLCs

Evolving issues Varying recognition in foreign jurisdictions Tax policy is catching up

IRS: Each series deemed separate legal entity;see 75 Fed. Reg. 55,699 (Sep. 14, 2010)

States: Varies. Kansas following IRS. ABA Section of Taxation Survey of the States Regarding their Intent to Conform to the Classification of Series LLCs for Federal Income Tax Purposes (4/13/2013).

Ambiguities under bankruptcy law Does the series have authority to file?

Does substantive consolidation doctrine apply to series?

Varying third party notice requirements

Revised LLC Act

Original LLC act adopted in 1990

KBA sponsored revision in 1999

KBA sponsored revision 2011-2014 H.B. 2398 (2013) Held over and adopted in 2014

Modeled on Delaware LLC Act (DLLCA)

Revised LLC Act

New section on revival LLC might be automatically canceled for failure to:

Pay taxes

File annual report

Appoint resident agent

Retroactive No time limit on election Fixes bug in prior act when resident agent resigns

Revised LLC Act

New section on trustees/receivers after cancellation District court can appoint after cancellation Authorizes company to bring/defend suit after cancellation Denies authority for members in their individual capacity to

assert undistributed causes of action

Revised LLC Act

Authorizes total waiver of fiduciary duties I.e., duty of care, duty of loyalty Except implied contractual covenant of good faith

and fair dealing If organizational documents are silent on fiduciary duties,

the default is they exist

BEST Act

H.B. 2721 (2014)

Business Entity Standard Treatment (BEST) Act

Sponsored by Kansas Secretary of State

Problems: Filing requirements scattered throughout code Filing requirements are inconsistent across entity types

Solutions: Stage 1: Consolidate filing requirements in one place Stage 2: Harmonize filing requirements (deferred)

BEST Act Fixes & Revisions

KRLLCA (2014) and BEST (2014) conflict in places

BEST only addressed Stage 1 (consolidation)

KSSOS working on a draft fix/revision bill

Regardless, BEST obfuscates comparisons with Delaware law

Benefit Corporations

What problem are people trying to solve here? Technical: In some cases, fiduciary duties mandate boards maximize

stockholder value above all else Philosophical: Liberal critique of corporate culture

Championed by B Lab, a Pennsylvania nonprofit Developed model benefit corporation act Advocacy/impact organization

Similar but different concept Low-Profit Limited Liability Companies (L3Cs): Streamlines private

foundation compliance with IRS rules on program-related investments (PRI)

Benefit Corporations

Key components of B Lab model act: Consider other interests besides profit maximization Regularly assess company against social criteria Assessment criteria are independent/third party Publicly report on assessment

Spreading rapidly among states

Delaware adopted b corps, but rejected model act

Benefit Corporations

B Lab began advocacy work in Kansas

Tough questions Who should lead discussion? B Lab model act vs Delaware minority approach? Who has resources to study issue?

Revised General Corporation Code Kansas General Corporation Code (KGCC) last

updated ~15 years ago

KBA sponsored review

Review includes evaluation of b corps

Targeting bill in 2016 session

Recap

2012: Series LLCs

2014: Revised LLC Act (KRLLCA)

2014: Business Entity Standard Treatment (BEST)

2015? BEST Act Fixes & Revisions

2016? Benefit Corporations

2016? Revised General Corporation Code (KGCC)