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Corporation or Limited Liability Company: A Difference That Matters When It Comes To Diversity Jurisdiction

February 15, 2018 By Gerald W. Ueckermann, Jr.

Corporations and limited liability companies (LLC’s) are business organizations that share many of the same characteristics.  There are, however, important differences.  One difference involves when federal diversity jurisdiction exists in lawsuits in which they are parties.

Federal courts have jurisdiction to hear lawsuits involving citizens of different states in which the amount in controversy is more than $75,000.  Pursuant to a federal statute, corporations are deemed to be a citizen of the state in which they are incorporated and of the state in which they have their principal place of business.  28 U.S.C. § 1332(c)(1).  While it may be tempting to assume that the same rules apply to LLC’s, this is not the case.  Rather, for the purpose of federal diversity jurisdiction, LLC’s hold the citizenship of their members (owners).  GenTech. Applications, Inc. v. Extroltda, 388 F.3d 114, 121 (4th Cir. 2004).  Thus, for example, if a limited liability company is owned by 10 members, all of whom are citizens of different states, the limited liability company is deemed to be a citizen of those 10 states.

What if the sole member of limited liability company A is limited liability company B?  In such situations, the citizenship of limited liability company B’s members will determine the citizenship of limited liability company A.  Bayerische Landsbank v. Alladin Capital Management, LLC, 692 F.3d 42, 51 (2nd Cir. 2012).  Where there are multiple layers of limited liability companies within a business organization, it is sometimes necessary to construct the equivalent of a family tree to determine the citizenship of a particular LLC.

The rules applicable to diversity jurisdiction and limited liability companies can lead to some unexpected results.  For example, an LLC that is formed under the laws of Maryland and which has principal offices in Maryland may be able to invoke federal diversity jurisdiction in a matter brought against it by a Maryland resident in Maryland state court if none of its members are Maryland citizens.  Conversely, there would be no federal diversity jurisdiction in an action brought by a Maryland resident in Maryland state court against an LLC that was formed under California law and which has its principal place of business in California if that LLC has a member who is a Maryland citizen.  Consequently, when representing an LLC, it is important to determine the citizenship of its members in order to ascertain if federal diversity jurisdiction exists.