Bulletin: AL000007

Dear Associates:

The Alabama Limited Liability Company Act can be found in the Code of Alabama, revised 1975 at Section 10-12-1 et seq.. The Limited Liability Company is a new form of business entity created by State Statute to take advantage of the features of both corporations and partnerships. The most advantageous aspect of the LLC is its tax status.

In the mid-1980's the IRS made a determination that the LLC would be taxed, as a general rule, like a partnership as opposed to a corporation. The income of the partnership is passed through to individual partners as opposed to a corporation's profits which are taxed and any dividends distributed to shareholders are taxed as personal income of the shareholder. After the IRS determination the LLC's have soared.

The second advantage of the LLC is the structural freedom allowed regarding organization, management and financial arrangements. The LLC may have a structured Board of Directors and Officers or it can have an informal structure with authority delegated to one individual, (The Member Manager).

Underwriting Guidelines:

• Articles of Organization

  LLC's creation begin with the Articles of Organization. The Articles must be filed in the Judge of Probates Office and office of the Secretary of State. The Articles must set forth the name, period of duration, purpose, location, names of initial members, terms of admission of new members, if any; right to continue; and any other provisions.

• Operating Agreement

  Stewart Title Guaranty Company will require a written operating agreement. This document is similar to a partnership agreement or the by-laws of a corporation and determines how an LLC will be managed. It will state who the managers are and their authority for daily operations. In each case we must ask; who has the authority to bind the LLC and is any special approval of the other members, managers or officers necessary?

• Liens and Judgments

  Against individual members including federal tax liens, will not attach to real property vested in the name of the LLC. An exception to this may be mergers (see below).

• Assignment of Interests

  As a general rule assignments of a members interest will require the unanimous consent of the other members of the LLC for title insurance purposes.

• Dissolution

  May occur upon the death, withdrawal, resignation, expulsion, bankruptcy or dissolution of another member entity or by judicial decree. Insuring a transaction which is in dissolution raises significant creditors rights issues. Insuring a loan transaction where the LLC is being dissolved the question arises as to why a dissolved entity wishes to borrow money?

• Mergers

  Contact this office or Houston Underwriting Counsel before insuring a merged LLC with another entity. Beware as liens against the disappearing LLC may attach to the new surviving entity. Indexes should be carefully run, as to both entities. Also be aware of name changes - review the Articles of Mercer which should be filed with the Secretary of State.