Inspired by the Federal Deposit Insurance Corp.'s decision to give deposit insurance to state-chartered banks incorporated as limited liability companies, Nebraska has repealed a law prohibiting state banks from adopting the structure.
Meanwhile, seven other states are mulling legislation that would let state-chartered banks form as LLCs. Three - Illinois, Louisiana, and Oklahoma, forbid banks to become LLCs - and Colorado, Georgia, Kentucky, and Tennessee make no mention of banks when listing what types of companies can become LLCs.
The Georgia and Colorado bills are sitting on the governors' desks, and approval seems likely in the five other states, including Illinois, where the bill passed the Senate nearly unanimously and awaits a vote in the House.
Still, even if all these bills become law, it is doubtful any banks would become LLCs until the Internal Revenue Service allows banks to have LLC status. The agency has not officially taken up the issue, but Mark Baran, senior tax counsel with the American Bankers Association, said the ABA has met informally with representatives of Treasury, which oversees the IRS, to discuss the possibility of taxing qualifying banks as LLCs.
The FDIC issued its ruling in January, six months after two small banks, hoping to lighten their tax burden, inquired about becoming LLCs. The Federal Deposit Insurance Act did not address the issue because the law was written long before the 1977 creation of LLCs.
Small and closely held banks in particular have pursued this because as LLCs they would not pay corporate income tax - the tax obligation would be passed along to the shareholders - and would have fewer restrictions than S corporations.
"Many banks have expressed interest in this corporate structure," said David Manning, the director of government relations for the Community Bankers Association of Illinois. "And if the IRS approves it, we would probably see plenty of conversion."
The ABA's Mr. Baran said he hopes these bills will prompt other states, and, more important, the IRS, to act. "We are pleased states are taking action to allow banks as LLCs," he said. "I hope this will raise the profile of the issue with the Treasury Department."
