LLCs in Iowa August 17, 2010 Des Moines, Iowa By Jason M. Stone, J.D., LL.M.

1. LLCs in Iowa August 17, 2010 Des Moines, Iowa By Jason M. Stone, J.D., LL.M. JasonStone@DavisBrownLaw.com

2. Background • History of LLCs • Originated outside the US • First US LLC act passed in 1977 (Wyoming) • First Iowa LLC act passed in 1992 • Check-the-box Regulations adopted in 1997 • 8,443 LLCs were formed in 2009 while only 2,577 corporations and only 418 limited liability partnerships were formed in 2009

3. New Act • Generally • Passed: 2008 • Effective: January 1, 2009 for LLCs formed on or after that date; January 1, 2011 for all others • Source: Based upon the Revised Uniform Limited Liability Company Act • Codified: Chapter 489 of the Iowa Code

4. New Act • Structure • Unlike prior acts, which drew from corporation law for guidance, the new act draws heavily from partnership law • It’s a default statute and can, except in limited circumstances, be varied by contract

5. New Act • Material Changes • Change in terms (e.g. Certificate of Organization vs. Articles of Organization) • Shelf LLCs • Change in the way votes are cast (per capita vs. per capital) • Change in the way distributions are made (per capita vs. per capital)

6. New Act • Material Changes • Elimination of statutory apparent authority for members in member-managed LLCs (Statements of Authority) • Clarification of fiduciary duties • Modifications to information provisions • Changes to transfer provisions

7. New Act • Material Changes • Changes to dispute resolution provisions • Changes to dissolution provisions

8. What does it all mean? • If you have a written operating agreement – not much. • If you don’t have a written operating agreement – you are in for big and potentially unwanted changes.

9. What do I do? • Adopt an operating agreement if you don’t already have one. • If you already have one, review it.

10. What to consider in when adopting or revising an operating agreement • Contribution provisions – particularly additional capital contribution provisions • Management structure • Information and reporting provisions

11. What to consider in when adopting or revising an operating agreement • Duties and obligations (competition and confidentiality) • Distribution provisions • Tax provisions • Dispute resolution provisions • Transfer provisions • Merger and Integration Clause • Amendment provisions

12. Tax Aspects of LLC’s Dave Watson August 17, 2010

13. Dice Holdings, Inc. Sarbanes-Oxley Project 2008 Tax Aspects of LLC’s Flow-through taxation - Compare to C-Corporations ▪ Income taxed at C-corp level ▪ Taxed again when distributed from corp i.e. dividends ▪ Losses trapped in C-corp ▪ Only offset by future income, if any 2

14. Dice Holdings, Inc. Sarbanes-Oxley Project 2008 Tax Aspects of LLC’s Flow-through taxation, cont’d. - One level of taxation for LLC’s ▪ Income not taxed twice ▪ Losses useable by members to offset other taxable income - Exception for passive members 3

15. Dice Holdings, Inc. Sarbanes-Oxley Project 2008 Tax Aspects of LLC’s Flow-through taxation, cont’d. - Compare to S-Corporations ▪ S-corps also have flow-through taxation ▪ Per/share, Per/day allocation - Special allocations of profits/losses available for LLC’s ▪ Possible shield from Self Employment tax 4

16. Dice Holdings, Inc. Sarbanes-Oxley Project 2008 Tax Aspects of LLC’s Debt used as basis - Allows members to take losses > capital contribution - At risk limitation - Passive activity limitation 5

17. Dice Holdings, Inc. Sarbanes-Oxley Project 2008 Tax Aspects of LLC’s Ownership Issues - Limit on types of S-corp owners ▪ No limit on types of LLC owners - Must have ≤ 75 S-corp shareholders ▪ No limit on number of LLC owners 6

18. Dice Holdings, Inc. Sarbanes-Oxley Project 2008 Tax Aspects of LLC’s Traps - Prior losses taken with help of debt may create phantom income later - All profits from trade or business may be subject to self employment tax - Corporate merger candidates could create taxable event 7