Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street N.W.
Washington, D.C. 20429
ATTN: Comments/OES
Re: Proposal on Insurance Eligibility of Limited Liability Companies
Dear Mr. Feldman:
The Kansas Bankers Association (KBA) appreciates the opportunity to
comment on such an important and progressive proposal. The KBA is a
nonprofit organization fortunate to have 367 of the 371 Kansas banks as
members. Included in its membership are many community banks as well as
larger, regional banks and holding companies.
As you are well aware, the key to this proposal is the statutory
requirement that only state chartered banks that are “incorporated” under
state law are eligible for federal deposit insurance. This proposal seeks
to clarify the term, “incorporated”, so that it encompasses not just the
legal entities identified as corporations, but also the legal entities
organized as Limited Liability Companies (LLC’s), if they meet certain
criteria.
The legal entity known as the LLC has become a very popular form of
organization for many types of businesses. The attractiveness of the LLC
is that it grants the owners the limited liability protections similar to
that of the corporate shareholder, taxes the owners (under the federal tax
code) as partnerships and contains no restrictions on the size and classes
of owners as does the Subchapter S corporation.
The proposal identifies four corporate attributes that must be present
in order for a state bank chartered as an LLC to be considered to be
“incorporated” for purposes of federal deposit insurance. These four
attributes are:
~ Perpetual Succession. This is necessary so that depositors can be
assured that events such as bankruptcy, or the death or disability or an
owner will have no effect on the existence of the financial institution;
~ Centralized Management. Having managers that operate as a Board of
Directors or in substantially the same manner is important in aiding in
the supervision of these banks;
~ Limited Liability. This encourages the stability of capital as it limits
the exposure of each owner to the amount of the owner’s investment.
~ Free Transferability of Ownership. Management and voting rights must be
transferable without the consent of any other owner so as to attract new
capital.
These four attributes are designed to bring together the regulatory
treatment of banks as LLC’s with the regulatory principles that apply to
bank organized under a more traditional, corporate structure.
The KBA is in strong support of this proposal. We believe that this
proposal is an important first step in enhancing the competitive abilities
of many banks.
Undoubtedly, this proposal will allow more banks to achieve a more
favorable tax treatment. Many of our community banks have been ineligible
for Subchapter S status due to limitations on the number and types of
owners allowed. It becomes increasingly difficult for Kansas banks to
remain competitive with other tax-advantaged financial institutions such
as the credit unions and the farm credit system. We believe it is in the
public’s best interests to keep all financial institutions competing on an
equal basis. This proposal will help in that endeavor.
In addition, we believe it is important to allow banks the same range of
corporate tax structures as other businesses have available to them. Banks
compete with a wide variety of institutions – many of whom already have
the ability to choose to organize as an LLC. Although a fairly new form of
entity, LLC’s are now considered one of the fastest growing forms of
corporate identity. Banks have shown that they perform well under other
types of business structures and should be allowed to pursue the identity
of an LLC.
Thank you, once again, for the opportunity to comment on this proposal.
For the reasons stated above, the KBA strongly supports this proposal as a
positive first step in allowing banks to continue to be competitive.
