- Online Edition
- Print Edition
- Donahue Lecture Series
- Archived Mastheads
One would expect the answer to the question posed in the title to depend to a significant degree on the extent to which legislatures have developed a unique theory of limited liability companies (LLCs) or have simply borrowed from other forms. Commentators and courts often describe an LLC as a “hybrid” combining certain corporate and partnership features. This characterization invites the notion that in any given case, an LLC should be thought of either as “like a corporation” or “like a partnership.” Viewed this way, an LLC may be unique in the manner it combines certain corporate and partnership features, but is perceived as having few, if any, features that are themselves unique or that, while inspired by the corporate or partnership form, play out in a manner other than they would in the corporate or partnership form. If a provision in a state’s LLC statute was obviously borrowed from the corporate or partnership context, then it should not be surprising to see courts relying on precedent from that context on the issue, and that is often the case. However, the case law provides glimpses of a unique theory of LLCs even where a concept, such as limited liability (a corporate concept) or the charging order (a partnership concept), has been borrowed from another form. If the issue is one that is not explicitly addressed within the parameters of the LLC statute, such as how an LLC or those associated with it are to be treated under another statutory or regulatory scheme, it also should come as no surprise when courts look at how other entities have been treated and whether and to what extent LLCs should be subject to similar treatment. . . .
Today the goal of many physicists, whether working with what are some of the largest machines ever built such as the newly christened Large Hadron Collider or with the rather more simple chalk and blackboard, is to develop a single unified theory that will explain the characteristics of the most elemental particles and integrating the four elemental forces, bringing together Heisenberg’s Quantum Theory and Einstein’s General Relativity. The law of business organizations lacks a similar goal of unification. Rather, we find ourselves continuously mixing, sometimes matching and sometimes not, aspects of business entity law, adding or removing features to various forms of organization without the benefit of a conceptual framework as to whether, across the range of business organization forms, we have made or are making progress. Now the question of “progress” must be distinguished from “motion,” and I submit that it, at a minimum, needs to be debated whether the mixing and recombination of features has been motion without a preconceived determination of what will be progress.
Much is made when discussing the limited liability company (the LLC), the modern partnership, and the limited partnership, the latter two being business forms driven into existence by the need to maintain relevance in a world now containing the LLC, of certain immutable characteristics of unincorporated business organizations. As a result of its being an unincorporated business organization, “an LLC must have this characteristic or that characteristic” has been oft uttered as a guiding principle. But what justification exists for the admonition made that this or that characteristic “must” be present in order that the LLC (or partnership or limited partnership) may be an unincorporated” business organization? In fact it has been all too little, if any. . . .
The law is often like a Slinky: there are two opposing poles, there is tension between the poles, and when one pole pushes out too far from the other, there is a tendency for the tension to pull the deviating pole back or to flip the opposite pole to the front. Similarly, United States business organization law, particularly as applied to partnerships and limited liability companies (LLCs), is a terrain of conflict in which different theoretical approaches strive for dominance. Unlike the laws of physics that control a Slinky, however, there is no state of nature that forces us to any given legal theory, but rather we choose which applies at any time and from time to time. . . .
The acceptance of the limited liability company (LLC) in 1998 afforded business owners and their advisors with a more straight-forward and flexible way of doing business than was available at that time. Two decades ago, there were two organizational forms under which business owners could obtain pass-through taxation without vicarious liability for the obligations of the organization—the S corporation and the limited partnership with a corporate general partner. The LLC eliminated some of the limitations attendant to each of these forms. Unlike the S corporation, the LLC has no limitation on the number and types of owners, the inability to have special allocations and other sorts of economic relationships, and the necessity to comply with state-law corporate strictures. Unlike a limited partnership with a corporate general
partner, the LLC does not require the maintenance of two organizations, and unlike limited partners, members of an LLC are not subject to potential vicarious liability for participation in management or control of the organization. In some respects it is remarkable that the simplicity and efficiency of the LLC would only come into existence after decades of increasing complexity in both corporate and unincorporated worlds. As Lord Buckley has put it, “it was so simple it evaded me.” . . .
The purpose of this essay is to analyze the question of whether there is, or should be, a single theory for interpreting and understanding the limited liability company (LLC). Should is the epitome of a normative question and could quickly devolve into an ideological morass without hope of resolution. Fortuitously, the recent thirtieth anniversary of Richard Dawkins’s The Selfish Gene suggests an analytical perspective on the question that may offer observational insight beyond ideological argument.
The perspective suggested by Dawkins’s landmark book is at two levels: (1) the entity level and (2) the law codification level. It is an evolutionary view that the LLC “seeks” success by the proliferation (reproduction and use) of the LLC form by individual firms—that is, from the perspective of the LLC as an artificial organism. This metaphoric perspective is certainly fanciful but is illuminating. First, the change in perspective is consistent with Dawkins’s hope for The Selfish Gene. . . .
Viewing the title of this Symposium and, in particular, its cadre of famous authors, one is inclined to ask: what is special about the twenty-year-old limited liability company business form to draw such talent to Boston and Suffolk University Law School? The simple answer is that it has been twenty years since the limited liability company went from obscurity to being the business organization of choice for small United States businesses.
Until the release of the Revenue Ruling 88-76, some twenty years ago in August 1988, only two states adopted limited liability company legislation: Wyoming in 1977 and Florida in 1982. The decade leading up to Revenue Ruling 88-76 was troubling for limited liability companies. The intrigue began in 1980 when a private letter ruling classified a Wyoming limited liability company as a partnership rather than a corporation for federal tax purposes. Under then-existing corporate resemblance regulatory classification standards, a Wyoming limited liability company was classified as a partnership because it lacked continuity of life and free transferability of interests. While it also possessed the limited liability and centralized management corporate resemblance factors, the regulations awarded ties in favor of partnership classification. . . .
Until the release of Revenue Ruling 88-76, only two states adopted limited liability company legislation, Wyoming in 1977 and Florida in 1982. In 1975, Alaska rejected adoption of the first limited liability company legislation based on concerns regarding the tax classification of a limited liability company. When Revenue Ruling 88-76 resolved those concerns, all fifty states and the District of Columbia adopted legislation by 1996, only eight years later. Revenue Ruling 88-76, however, did not resolve whether a single-member limited liability company should be classified as a sole proprietorship or a corporation. That matter was not resolved until 1997 with the release of the check-the-box regulations. Again, within a few years all states had amended their limited liability company legislation to permit a single-member limited liability company. Further still, while Delaware adopted series limited liability company legislation in 1996, the check-the-box regulations did not address the classification of a series within a limited liability company. Since 1996, only six other states have followed suit. The 2008 release of Private Letter Ruling 200803004 classifying a series in the same manner as any other business entity under the check-the-box regulations signals a potential amendment of those regulations to embrace the series. If so, once again, all remaining states might be expected to provide for a series. . . .
In 1975, the Massachusetts Supreme Judicial Court decided what has since become an iconic case of the law of closely held corporations, Donahue v. Rodd Electrotype Company of New England, Inc. The company, Rodd Electrotype, had been founded by two men. One had died, leaving his stock essentially to his widow. The other founder, getting on in years, sought to have the company buy out his holding to the ultimate advantage of his adult children. Not surprisingly, the widow of the deceased founder saw no reason why company money should redeem the stock of one founder while leaving her to take whatever fate (or that founder’s children) might have in store for her.
She sued, and the Supreme Judicial Court ruled in her favor. In doing so, the court made a historic characterization and announced a rule of law that have together remained at the core of the law of closely held corporations for more than thirty years . . . .