This article appeared as a Guest Column in The Journal Record on Jan. 27, 2021.
LLCs have quickly become the dominant legal entity of the 21st century for various reasons. Like any business entity, LLCs frequently find themselves involved in litigation. When a dispute reaches its boiling point, many businesses prefer to litigate in federal court because of, among other advantages, rigid deadlines and the assurance of a highly qualified presiding judge.
However, LLCs often struggle to qualify for access to the federal judicial system via “diversity jurisdiction,” which requires the citizenship of the plaintiff and defendant to be completely diverse. In other words, no plaintiff can be from the same state as any defendant.
Existing case law deems an LLC a citizen of every state in which its members reside, and likewise for a partnership. By contrast, a corporation is a dual citizen of both: (1) its state of incorporation; and (2) its principal place of business.
For an LLC to qualify for diversity jurisdiction, federal courts require a nuanced member-by-member analysis. For a single-member or “mom and pop” LLC, determining citizenship is simple. However, larger LLCs pose complex and time-consuming difficulties. Larger LLCs often have dozens of members, including corporations, individuals, partnerships, and even other LLCs.
In such a situation, the citizenship of all entities must be determined, including any sub-entities that may have partners or members of their own, who, in turn, may have additional partners or members. The exercise is theoretically endless, and, more practically, expensive and burdensome. The more members there are, the greater the odds that complete diversity will not exist.
As a practical example, if an Oklahoma individual, invoking diversity jurisdiction, wishes to sue an LLC in federal court, and the LLC has one member who is a citizen of Oklahoma, the court will dismiss the lawsuit for lack of subject matter jurisdiction. Relatedly, if an LLC is sued and wishes to remove the case to federal court, it too must ensure that its members (and their member’s members) are completely diverse from the plaintiff.
Organizing a company as an LLC provides many advantages, and LLCs continue to represent the lion’s share of business entities incorporated in the 21st century. However, any business that anticipates finding itself in federal court should consider the issues discussed above, which can operate to their benefit (or detriment).
For more information on how the information in this article may impact your business, please call 405.552.2471 or email Justin G. Bates.
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