Cheeseheads and Longhorns: Why Texas Should Follow Wisconsin’s Lead in the Treatment of Limited Liability Company Member Interests as Securities

Abstract

The limited liability company has become one of the more attractive business associations, both for legitimate enterprises seeking flexibility in structure, shields from personal liability for company debts and obligations, and tax advantages, and for the not-so-legitimate enterprises seeking shelter from personal liability for taking advantage of the unwary. In order to assist and protect the investing public and to provide certainty and structure for business owners, Texas should amend its current statutory scheme to mandate the treatment of certain LLC interests as securities, modeling this legislation after the Wisconsin approach-a three-tiered method of defining an LLC as a security. Part II of this Comment will describe the LLC entity and its history, enumerate its advantages, and give a brief description of the 1997 IRS taxation changes. Part III will delve into the much-debated question whether LLC member interests are securities and will describe the benefits of treating them as such. Part IV will describe the Texas treatment of LLC member interests to date and the problems that accompany that treatment. Part V will describe some other states' treatment of LLC interests and how the Wisconsin approach is preferable. Part VI will enumerate the proposed changes to Texas law modeled after those states' regulations.