“LLCs” Governor Owens’ Favorite Loophole

Confidant Nancy Watzman has reminded us today of the LLC loophole in Colorado’s campaign finance laws.  While corporations aren’t allowed to make contributions under Colorado’s state constitution, limited liability companies (LLCs) can.  Why does Colorado law make an irrational distinction between LLCs and corporations? 

Because, on May 31, 2005, Republican Governor Owens vetoed the bill that would have closed the loophole, House Bill 05-1332.  The veto effectively kept open a loophole so big that it makes all campaign finance disclosure and contribution laws in Colorado voluntary and little more than a dead letter, contrary to the intent of Colorado voters.Let’s review the subject, because it involves campaign finance law and “corporate” law.

Colorado Bans Corporate and Labor Union Participation in Candidate Elections

In 2002, Colorado voters adopted a voter initiative, Amendment 27, that created Article XXVIII of the Colorado Constitution, entitled “Campaign and Political Finance.”

Corporations and unions in Colorado aren’t allowed to give spend money on campaigns for candidates for public office (although they can facilitate donations by setting up a PAC or committee for individuals affiliated with them). 

Specifically, section 3(4) of this Article of the Colorado Constitution provides in that (emphasis added):

It shall be unlawful for a corporation or labor organization to make contributions to a candidate committee or a political party, and to make expenditures expressly advocating the election or defeat of a candidate; except that a corporation or labor organization may establish a political committee or small donor committee which may accept contributions or dues from employees, officeholders, shareholders, or members.

There is an exception for non-profits organized as corporations which are political organizations (such as PACs and political parties).

Corporations and unions can’t get involved in candidate campaigns indirectly either, by running ads near an election that talk about a candidate without containing a statement of endorsement or opposition.

Section 6(2) of this Article of the Colorado Constitution goes on to say (emphasis added):

[I]t shall be unlawful for a corporation or labor organization to provide funding for an electioneering communication; except that any political committee or small donor committee established by such corporation or labor organization may provide funding for an electioneering communication.

And what is an electioneering communication?

The short answer is that they are campaign ads in the two months prior to an election (one month for a primary).  Section 2(7) of this Article of the Colorado Constitution tells us:

“Electioneering communication” means any communication broadcasted by television or radio, printed in a newspaper or on a billboard, directly mailed or delivered by hand to personal residences or otherwise distributed that:

(I) Unambiguously refers to any candidate; and

(II) Is broadcasted, printed, mailed, delivered, or distributed within thirty days before a primary election or sixty days before a general election; and

(III) Is broadcasted to, printed in a newspaper distributed to, mailed to, delivered by hand to, or otherwise distributed to an audience that includes members of the electorate for such public office.

(b) “Electioneering communication” does not include:

(I) Any news articles, editorial endorsements, opinion or commentary writings, or letters to the editor printed in a newspaper, magazine or other periodical not owned or controlled by a candidate or political party;

(II) Any editorial endorsements or opinions aired by a broadcast facility not owned or controlled by a candidate or political party;

(III) Any communication by persons made in the regular course and scope of their business or any communication made by a membership organization solely to members of such organization and their families;

(IV) Any communication that refers to any candidate only as part of the popular name of a bill or statute.

Colorado Law Doesn’t Ban Contributions From Entities Other Than Corporations and Labor Unions

Alas that drafters of the initiative, while sincere in their desire to shut down corporate influence in politics, were not so sharp in the area of corporate law.  Specifically, they failed to realize that other kinds of organizations exist.

This isn’t a big problem with non-profit entities other than labor unions, since most are either organized as corporations, within the political organization exemption, or banned from participating in candidate elections under federal tax law.

Colorado Entity Types In A Nutshell

Colorado has boatloads of different kinds of business entities other than corporations, most of which are described in Title 7 of the Colorado Revised Statutes (some entity types are duplicated because they come in more than one category).

Unincorporated Non-Profits Entities:
* Unincorporated Nonprofit Associations (Article 30)
* Religious and Benevolent Organizations (Article 50)

Most unions come under the jurisdiction of the Unincorporated Nonprofit Association Act.

Non-Profit Corporations:
* Non-Profit Corporations (Article 40 & 121-137)
* Ditch Companies (Article 42)
* Pipeline Companies (Article 43)
* Water User’s Associations (Article 44)
* Toll Road Companies (Article 45)
* Cemetery Companies (Article 47)
* Joint Stock Religious and Benevolent Organizations (Article 51)
* Corporations Sole (Article 52)

For Profit Corporations:
* Colorado Business Corporations (Articles 101-117)
* Ditch Companies (Article 42)
* Pipeline Companies (Article 43)
* Water User’s Associations (Article 44)
* Toll Road Companies (Article 45)
* Cemetery Companies (Article 47)
* Business Development Corporations (Article 48)

* Cooperatives (Article 55 & 56)

Cooperatives may be incorporated or unincorporated.  They may earn profits for their members or retain profits (which are in that case subject to taxation).

Entities Usually Taxed As Partnerships:
* Various Partnerships, Limited Partnerships, Limited Liability Partnerships and Limited Liability Limited Partnerships (Articles 61, 62 & 64)
* Limited Partnership Associations (Article 63)
* Limited Liability Companies (Article 80).

Furthermore, outside that Title 7 of the Colorado Revised Statutes trusts, business trusts and various quasi-governmental organizations.

In practice, most businesses in Colorado that are organized as entities are either corporations or limited liability companies.

General partnerships usually exist only by operation of law when non-legally trained people create them by accident.  Limited Partnership Associations were invented mostly for estate planning purposes and never caught on.

Most limited partnerships and limited liability partnership (and limited liability limited partnerships) are vestiges from the days before the limited liability company was given favorable tax treatment by the Internal Revenue Services.

Business trusts are fairly rare in Colorado.

Cooperatives are also relatively rare with various agricultural and rural cooperatives from the depression era making up the bulk of them, and a few natural foods coops accounting for most of the trest.

What Is An LLC?

For all practical purposes, a limited liability company (LLC) functions exactly like a closely held corporation as far as the outside world is concerned.  It is essentially identical vis-a-vis creditors, in bankruptcy, in contracts, and in tort liability.

Corporations generally have shareholders who elect a board of directors who in turn appoint officers who run the corporation (e.g. the President, Secretrary, Treasurer, CEO, CFO, etc.).

Limited liability companies have “members” who generally elect “managers” who serve a role more or less identical to corporate officers to run the company, but usually dispense with a board of directors.

Most corporations are organized under Subchapter S, a provision of the tax code that imposes a simplified version of partnership taxation in which the profits and losses for the year are reported on shareholder tax returns for the year.  Usually, they pay no corporate level income taxes (there are certain taxes that are de facto fines or transition provisions). 

Most corporations that aren’t organized under Subchaper S (called C corporations) pay all of their profits in the form of wages and bonsues to employee-shareholders every year, although if they don’t pay out all of their profits, they do have to pay corporate level income taxes, and have to pay taxes again when dividends are paid out of those funds.

Most LLCs and partnership type organizations are treated as partnerships for tax purposes.  Like S corporations, profits and losses for the year are reported on member or partner’s individual tax returns for the year.  They almost never pay an entity level income tax.  It is possible, however, for an LLC to elect to be taxed as a corporation for tax purposes, making it identical to a corporation for all purposes other than Colorado’s campaign finance laws.

Unless you care about the nuances of tax law on fringe benefits and witholding taxation, there are no practical differences between an LLC and a corporation.  None of the differences have any relevance to campaign finance.

What did HB 05-1332 do?

House Bill 05-1332, which was introduced by primary state house sponsor Anne McGihon (with whom I work, full disclosure) and whose primary state senate sponsor was Dan Grossman (both Democrats from Denver) would have applied essentially the same prohibitions that apply in Colorado to corporate and union donations to LLCs, (1) if it was owned in part by someone prohibited from making campaign donations to candidate races, or (2) it is treated as a corporation for tax purposes (they can elected to do so, and must do so if they are publicly traded).

The bill passed on a largely party line vote, with the final votes cast on May 6, 2005 (near the end of the legislative session), with Democrats overwhelmingly in favor, and Republicans overwhelmingly opposed.  Donetta Davidson, the Republican Secretary of State then in office had been on board with the bill, at least initially, but ultimately this didn’t stop it from being vetoed.

Thus, it would have expressly prevented LLCs from being used as strawmen for illegal contributions by requiring them to affirm, if they made a contribution that they had no illegal donors (something almost all candidates have in similar language on contribution forms from individual donors).

It would also have treated donations made by an LLC as if they were made by all of the members of the company for disclosure and campaign contribution limitation purposes on a proportional basis, so that LLCs couldn’t be used to cloak campaign contributions or expand limits on contributions.  These notions are consistent with the general notion that limited liabilities are pass through partnership-like entites for tax purposes.

The bill didn’t impose any additional contribution limits other than those described above, it did not, for example, ban contributions from LLCs, and it didn’t address less pressing issues like partnerships, non-profits (that are allowed to make contributions and aren’t corporations or unions), and cooperatives for another day.

The Veto

Given this background, it is hard to describe Governor Owen’s veto letter as anything but disingenuous.

His statements about the immense compliance costs involved and the idea that “an entity would need a full-time staff to ensure compliance” falls in the “making shit up” category.  And, of course, all compliance costs could be avoided by simply making contributions directly from individuals, which is the point of Colorado’s campaign finance laws.

The Governor’s statement that “LLCs will not likely contribute if any one member wishes to retain his or her privacy.”, is exactly the point of the bill.  Colorado has enacted in its constitution a scheme to prevent people from making private donations to candidates by requiring disclosures of individual donations and banning the most common entity donations, corporate and union money.

And, of course, if the only problem is that the bill covers LLCs which are the heart of the current problem, and not partnerships or cooperatives, the answer is not to veto the bill, but to urge another one next year.

Instead, anyone can, for a small filing fee, make as many LLCs as they wish, and make anonymous campaign contributions to candidate races from all of them, rendering Colorado’s campaign finance laws all but a dead letter, except in involved “veil piercing” litigaiton where LLCs are determined to be just an alter ego of their creator with no legal reality attached to them, a very difficult standard to meet, at worst, and governed by undefined common law that provides traps for the unwary, at best.