Cunningham on LLCs: More key provisions of New Hampshire law

John Cunningham

Note: If you are a New Hampshire LLC member or manager or if you plan to form a New Hampshire LLC, you and your business advisers need to have a solid basic knowledge of LLC law and tax in order for your LLC to succeed. This another in a series of columns to provide you with this knowledge.

Here’s a discussion of provisions 13 to 16 in the New Hampshire LLC Act:

13. 13. LLC members’ transfers of their membership rights to third parties (Section 121): Unless the operating agreement provides otherwise, LLC members may not transfer all or any of their membership rights to other members or to third parties except upon the unanimous vote of the members.

Comment: The founders of most LLCs that have two or more members create their LLCs as a vehicle for conducting a multi-owner business, and the founders usually view compatibility among their LLC’s members as essential to its success. This “partnership compatibility” principle is the basis for the requirement of Section 121. In my experience, the most common situations in which a multi-member LLC’s operating agreement will NOT contain the above requirement are these:

• For some reason, the members of the LLC do not view partnership compatibility as essential to their LLC’s success—perhaps because the purpose of the LLC is not to conduct a business, but rather, for example, to invest in real property.
• One or more of the LLC’s members are also key investors in it, and these investors want a contractual right to admit a new member even if the existing members disagree.

14. Admissions of new LLC members (Section 120): An LLC may not admit a person as an additional member of the LLC after the LLC’s formation except upon the unanimous vote of the members.

Comment: The rationale for Section 120 and for operating agreement exceptions to the section is the same as for section 121, discussed above.

15.Conversions of corporations to LLCs (Sections 147 through 150): New Hampshire corporations and other non-LLC entities can be readily converted to LLCs, and vice versa.

Comment: The statutory provisions of Sections 147 through 150 make it easy for corporate shareholders, with the help of their lawyers and accountants, to convert their corporations to LLCs. In these conversions, all of the legal and tax arrangements of the converted corporation are the same for the newly formed LLC.

There are two main reasons New Hampshire corporate shareholders may want to make these conversions:

• The New Hampshire interest and dividends tax imposes a 5 percent tax on distributions of a corporation’s profits to its shareholders who reside in New Hampshire. This rule does not apply to the members of New Hampshire LLCs as long as their operating agreements are properly drafted. The shareholders of many New Hampshire corporations have converted their corporations to LLCs — or ought to convert them—to protect their shareholders from this tax. (It should be noted, however, that over a period of years, this 5 percent rate will be phased down to a 1 percent rate.
• The New Hampshire LLC Act provides LLCs owners with far greater flexibility in structuring an operating their business than the New Hampshire Business Corporation Act (BCA) can provide. For example, in the operating agreements of their LLCs, the managers of LLCs can completely eliminate their fiduciary duties of care and loyalty to the members and thus minimize the risk of suits against them by these members. No similar elimination right is available under the BCA.

16. LLC charging orders (Section 126): Under Section 126, creditors of LLC members can obtain court orders transferring to these creditors LLC distributions of LLC profits otherwise payable to the debtor-members. However, with narrow exceptions, creditors can’t obtain court orders transferring to them the members’ LLC memberships.

Comment: In a previous article, I’ve explained the very considerable complexities of LLC charging order protections available to LLC members under Section 126 in some detail. I won’t repeat that explanation here. However, LLC members and their professional advisors understand that LLC charging order protections are often substantially more valuable to LLC members than even their LLC liability shields. And the BCA doesn’t provide charging order protections.

John Cunningham is an attorney of counsel to the law firm of McLane Middleton whose practice is focused on LLC law and tax. He can be contacted at lawjmc@comcast.net, 603-856-7172 or llc199A.com.