How Big Is The LLC Loophole?

The toughest provisions of Colorado’s campaign finance rules, set forth mostly in Article XXVIII of the Colorado Constitution, reserve their toughest limitations (basically an outright ban on contributions) for corporations and unions.  Most people looking at the law believe that limited liability companies (LLCs) don’t count as corporations, an interpretation supported by the parallel Fair Campaign Practices Act.  C.R.S. 1-4-103(7).  Indeed, an LLC falls squarely within the definition of the person for Colorado campaign finance law purposes.  This “loophole” in the campaign finance laws is there because Republican Governor Owen’s vetoed a bill to close it.

But, while LLCs can make campaign contributions in Colorado, that doesn’t mean that an LLC has an unlimited ability to launder the contributions of others.  Why?  Colorado law imposes limits on people acting as conduits for contributions.The Law

(7) No person shall act as a conduit for a contribution to a candidate committee. . . .

(9) No person shall make a contribution . . . with the expectation that some or all of the amount will be reimbursed by another person.  No person shall be reimbursed for aa contribution . . . nor shall any person make such reimbursement.

— Colorado Constitution, Article XXVIII, Section 3, subsection (7) and (9) (in the pertinent parts).

Subsection (8) of Section 3 of the campaign finance laws allows only financial institutions to make loans to campaigns.

The Colorado Constitution also defines conduits.

“Conduit” means a person who transmits contributions from more than one person, directly to a candidate committee.

— Colorado Constitution, Article XXVIII, Section 2, subsection (4) (in the pertinent part).  Campaign fund raisers and immediate family members are excluded from the definition of conduit.

Analysis

Under federal law, contributions form LLCs are considered to be contributions from the people who own the LLC, consistent with the partnership basis upon which they are usually taxed.  Ironically, under Colorado law, it appears that even an LLC which elects to be a corporation for tax purposes still isn’t one for campaign finance purposes. 

So, under Colorado law the key questions are “when is an LLC a mere conduit?”, and “is the LLC reimbursed?”

If an LLC is a conduit, then the contribution is illegal.  If it is not, then the contribution is legal with the LLC treated as a separate person for the purposes of the campaign finance limitations. 

Donors and campaigns receiving the donations would like the seperate person interpretation leaves contributors able to give both personally, out of funds that they have a claim on in the company, in addition to their own personal funds.

Also, while the state legislature under the Fair Campaign Finance Practices Act defines “corporation” narrowly, the state constitution does not define that term.  A judge could say that for campaign finance purposes that an LLC is really a corporation, at least, for example, if it elects to be taxed as a corporation.

Examples

One can imagine some LLC scenarios that would seem to be clearly conduit cases.  For example, suppose that two people get together and put money into Sneaky LLC, have no business plan, and then Sneaky LLC makes a contribution to the B. Ritprez for Colorado Governor campaign.  This looks like a pretty blatant campaign finance conduit contribution violation.

Similarly, suppose that Fred Flintstone, general manager of Bedrock Gravel, LLC, a functioning gravel pit business with several owners, has the LLC cut a check to the B. Ritprez for Colorado Governor campaign, and then immediately cuts a personal check to Bedrock Gravel, LLC labeled “reimbursment for contribution” in the same amount.  Again, it is clear that the campaign finance law has been violated.

A harder case comes up when RoboCall, LLC, a profitable robo-calling firm with multiple owners and no start up capital because it rents its robocalling machines and had money on day one from its first robocalling contract, gives money out of its profits to Sleezebag for State Senate, a candidate who has strongly supported repealing the “no call list.”  This is likely not a conduit contribution.

It unclear, on the face of the law, if a shell LLC with a single member who is the only person involved in the LLC, is completely free to put personal funds into the shell LLC to make campaign contributions with, and make additional campaign contributions his own personal funds, so long as there is no reimbursment. 

Why?  The definition of “conduit” in the state constitution describes contributions from “more than one person”. 

The question are (1) if the money comes from the owner’s contributions to capital, and not the business profits of the entity itself, is that a contribution from the owner, in which case saying that it is from the LLC is deceptive, (2) if some contributions come from the single owner via capital contributions, and some come from the LLC, are there contributions from the the owner and the LLC and hence from more than one person, and (3) does the narrow definition of “conduit” in the Colorado Constitution really mean that other forms of “sham transactions” are not prohibited.

Bottom Line

How cases claiming contributions from LLCs to campaigns are shams, are conduits, or are reimbursed for contributions ultimately are resolved has not be thoroughly litigated.

There are plenty of open questions.  And, many hinge on esoteric metaphysics of corporate and partnership and limited liability company law.

So, while it is certainly possible that the LLC loophole to campaign finance contribution limits is absolute, that conclusion is premature until cases are tested in court.

 

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Andrew Oh-Willeke

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