Jurisdictional Jigsaw: LLCs in Federal Court

Savvy entrepreneurs love the taxation and liability benefits of Limited Liability Companies (“LLCs”). As a relatively new form of business organization, the LLC has continued to grow in popularity since Wyoming became the first state to recognize LLCs by state statute in 1977. My home state—Georgia—did so in 1992 (for non-Georgia based LLCs) and 1993 (for Georgia based LLCs). But along with the rising popularity of the LLC came an interesting legal peculiarity.

An LLC—unlike time-tested sole proprietorships, partnerships, and corporations—presents unique jurisdictional challenges in federal court. In short, LLC members (and those who wish to sue such members) may not realize the potentially large amount of time, effort, and money required to simply bring (or defend) a federal suit involving LLCs. 

In federal court, a plaintiff is often required to prove that each defendant is "of [a] different State[]" (i.e., "diverse") from each plaintiff.  See 28 U.S. Code § 1332(a)(1).  And as the Eleventh Circuit has stated, an LLC “is a citizen of every state that any member is a citizen of.” See Purchasing Power v. Bluestem Brands, 851 F.3d 1218, 1220 (11th Cir. 2017). But the legal “puzzle” doesn’t truly take form until one considers the Court’s next sentence: “And it is common for an LLC to be a member of another LLC.” Id.

In other words, proving jurisdiction for an LLC in federal court is—in some cases—like assembling together the pieces of a puzzle where the number of pieces may continue to increase!

Despite this challenge, however, federal jurisdiction remains possible for an LLC. But litigants would do well to count the cost (or puzzle pieces) before forging ahead.