Financial Update (First Quarter 2003)


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FDIC Agrees to Insure State Banks Chartered as LLCs

By Alaina Gimbert, assistant counsel

On Feb. 13, 2003, the Federal Deposit Insurance Corp. (FDIC) published a final rule that allows state banks chartered as limited liability companies (LLCs) to apply for deposit insurance. Previously S corporations were the only pass-through tax entities that qualified for deposit insurance.

LLCs, which also provide pass-through tax treatment, are generally more attractive to banks than S corps because S corps are restricted in the number and type of shareholders they can have. Furthermore, S corps can have only one class of stock. LLCs do not have the same restrictions.

Federal tax laws do not currently permit pass-through treatment for LLCs that are state-chartered banks; nonetheless, banks, especially community banks, like having the option to structure themselves as LLCs for state tax benefits and with the hope that the federal rules will change.

Comments and final rule
In response to inquiries from two state banks that wished to organize as LLCs, the FDIC released a proposed rule last July and requested comment on the issue. Because the FDIC may insure only state depository institutions that are incorporated, last July’s proposed rule suggested that LLC-structured banks be eligible for insurance if they satisfied the four traditional attributes of a corporation: perpetual succession, centralized management, limited liability and free transferability of interests.

In October the FDIC received 23 comments on the proposed rule. The commentators unanimously supported the proposal to permit LLCs to be eligible for deposit insurance. However, 13 of the commentators asserted that the FDIC should not require LLCs to have the four traditional attributes of corporations. Rather, they suggested that the only requirement for insurance eligibility should be that an LLC is properly chartered under state law.

The final rule requires LLC-structured banks to satisfy the four traditional attributes of a corporation. Responding to the suggestion that the only requirement for eligibility should be that LLCs are properly chartered under state law, the FDIC stated that such a rule would require it to abdicate to the states its statutory responsibility to determine which entities are eligible for insurance. Furthermore, because state laws vary as to what attributes an LLC may have, such a rule would result in LLCs with a wide variety of attributes being eligible for deposit insurance. The FDIC concluded that these results would impair its ability to manage risks to the insurance fund.

The final rule becomes effective March 17, 2003.

Related links
Final rule allowing state banks chartered as LLCs to apply for deposit insurance
Proposed rule
Comments on proposed rule

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