Denver Small Business Attorney Article: Does a DRO in an LLC Shift the Risk of Economic Loss?

Previous articles have been drafted regarding the impact of a deficit restoration obligation on recourse debt and loss allocation andDenver Small Business Attorney the impact of a deficit restoration obligation on equity allocations.  As a Denver small business attorney, John McGuire would like to discuss one more issue regarding a deficit restoration obligation and a Limited Liability Company, which is discussed below.

By virtue of being a limited liability company, the liabilities of a limited liability company generally constitute liabilities of which the creditor’s rights to repayment are limited to one more assets of the limited liability company because the members of the LLC are not obligated or required to make contributions to the LLC to satisfy or discharge LLC liabilities.  Therefore, in the opinion of our Denver small business attorneys, the presence of a deficit restoration obligation creates an interest issue.  This issue and question being, does the presence of a deficit restoration obligation expand the creditor’s right to repayment such that something beyond the assets of the limited liability company could be exposed to repay the debt?  Thus, the debt of the limited liability company could in fact be recourse debt as opposed to non-recourse debt?

Answers to these questions will depend upon whether the deficit restoration obligation is an asset of the limited liability company, and whether the creditor has the right to pursue the deficit restoration obligation under state law.  If the deficit restoration obligation is considered an asset of the limited liability company and the creditor can collect through the deficit restoration obligation under state law, the deficit restoration obligation would be deemed to shift the economic risk of loss of the applicable debt.  The reason for the shift is, the assets of the LLC would be considered sold for nothing thus the limited liability company would experience a loss and trigger the deficit restoration obligation partner’s LLC capital account in the red.  If the deficit restoration obligation was an asset of the limited liability company that a creditor could pursue, the creditor’s rights would be limited to the assets of the limited liability company.  Thus, if the deficit restoration obligation was an asset of the LLC there would be no shifting of economic risk of loss because the assets (including the deficit restoration obligation) would be considered sold for the debt’s face and there would be no negative capital account balance.  With no negative capital account balance, there would be no negative capital account for a deficit restoration obligation to apply to.

The McGuire Law Firm can assist you with business issues such as those discussed above.  Mr. McGuire holds an advanced degree in taxation known as an LL.M. This degree helps him as a business attorney when analyzing your options and goals due to fact that tax plays an intricate role in the vast majority of business issues and decisions.

Contact The McGuire Law Firm to speak with a Denver small business attorney and schedule your free consultation.