110th CONGRESS, LEGISLATIVE ISSUES A - Z
LIMITED LIABILITY COMPANY (LLC) BANKS
ISSUE: A Limited Liability Company (LLC) is a government authorized company that combines protection from individual liability like a corporation with the pass-through tax treatment of a partnership. That is, shareholders are taxed individually on the company’s income.
An LLC bank is subject to fewer restrictions than a traditional corporate bank or a Subchapter S bank. For example, a Subchapter S corporation may have no more than 100 shareholders, only one class of stock, and no nonresident alien shareholders. An LLC has no such restrictions.
In addition, the Federal Deposit Insurance Corporation (FDIC) has ruled that state- chartered LLC banks are now eligible for federal deposit insurance if they meet the Corporation’s safety and soundness criteria.
Some banks have organized as LLCs as the regulation and potential tax status is more preferable than other forms of corporate organization. Currently, only a small number of states allow banks to organize as LLCs. However, that number can be expected to increase if the Internal Revenue Service (IRS) approves pass-through federal taxation status for state- chartered LLC banks.
The number of LLC banks would explode if Congress passes legislation that would allow national banks to organize as LLCs. Last year, the House of Representatives passed the Financial Services Regulatory Relief Act (H.R. 3505), that would have allowed banks to organize as LLCs. The bill was supported by CUNA because it included regulatory relief not only for banks, but also credit unions and thrifts. The final version of the bill that was enacted into law did not include the provision that would have allowed national LLC banks (Sec. 109 of the House-passed bill).
CUNA POSITION: CUNA does not oppose the efforts of the banking industry to expand its tax benefits. CUNA does point out, however, the hypocrisy of the banking industry that on one hand seeks to impose additional taxes on credit unions while, on the other hand, aggressively lobbies to increase tax advantages for banks.
IMPACT ON CREDIT UNIONS: The banking industry has stepped up its attempts to repeal credit union tax-exempt status, while simultaneously lobbying to dramatically increase its tax breaks. The industry’s success weakens its arguments against the credit union tax exemption.
STATUS/OUTLOOK: It is expected that the banking industry will continue to pursue expansion of the Limited Liability Company rules to allow banks to organize as LLCs.
On December 21, 2005, Senators Mike Crapo (R-ID), Orrin Hatch (R-UT), Jim Bunning (R-KY), and Blanche Lincoln (D-AR) signed a joint letter to Treasury Secretary John Snow urging him to call on the IRS to recognize LLC banks. That letter was similar to one authored by Hatch and Senators Gordon Smith (R-OR) and John Breaux (D-LA) in July of 2004. This demonstrates bipartisan Congressional interest in advancing this issue for the banking industry.
Also, the banker-backed Communities First Act (H.R. 1869 and S. 1405) has been reintroduced this year in the House of Representatives on April 17, 2007 and in the Senate on May 16, 2007. It proposes giving FDIC-insured LLC banks pass-through entity federal tax treatment.
CONTACTS: John Hildreth, (202) 508-6724, jhildreth@cuna.coop.
